If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of $100,000 will be
A) Equal to $100,000
B) Greater than $100,000
C) Less than $100,000
D) Greater than or less than $100,000, depending on the maturity date of the bonds

Question

Quizplus · Accepted Answer

When the market rate of interest is 8%, the price of a bond paying a lower interest rate (6%) will be less than its face value ($100,000) because investors can earn a higher return by purchasing a bond with a higher interest rate. The bond's price will decrease until its yield to maturity is around 8%. Therefore, the price of the 6% bonds will be less than $100,000.

If the Market Rate of Interest Is 8%, the Price