Question

If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be

A) greater than $500,000
B) greater than or less than $500,000, depending on the maturity date of the bonds
C) less than $500,000
D) equal to $500,000

Answer 1

C. less than $500,000

Step-by-step explanation:

Price of a bond is the present value of all future cash flows receivable from the bond discounted at market rate of interest . Cash flows which will be discounted include periodic interest payments and maturity value . When market interest rate is higher than the interest rate offered by the bond, the cash flows receivable from the bond are discounted at higher rate due to which the value of the bond falls below its par value as the investment is less attractive to people due to lower interest offered by the bond

So, the bond price will be less than $500,000