Suppose a bond’s price is expected to increase by 5% if its market discount rate decreases by 100 basis points. If the bond’s market discount rate increases by 100 basis points, the bond price is most likely to change by:
A) 5%.
B) less than 5%.
C) more than 5%.

Question

Quizplus · Accepted Answer

The question only gives information about the expected change in bond price when the market discount rate decreases. Therefore, we cannot assume that the bond price will change by the same amount when the market discount rate increases. Generally, bond prices and market discount rates have an inverse relationship, meaning that when one goes up, the other goes down. So, if the market discount rate increases by 100 basis points, we would expect the bond price to decrease. However, we cannot determine the exact amount of the decrease based on the information given. Therefore, the bond price is most likely to change by less than 5%.

Suppose a Bond’s Price Is Expected to Increase by 5