Final answer:
For bonds issued at an interest rate lower than the current market rate, the bond prices will decrease, and the yields will increase due to their inverse relationship. The face value of the bonds remains unchanged.
Step-by-step explanation:
The correct statement relating to bonds that were issued two years ago with an effective interest rate that was lower than the current effective interest rate is that bond prices have decreased (b), and the bond yields have increased (d). This is because bond prices and yields are inversely related; when new bonds are being issued at a higher interest rate than existing bonds, the existing bonds become less attractive, causing their market value to decline to compensate for the lower interest rate. The bond's face value does not change (g, h).
Using the Ford bond example, if the market interest rate rises from 3% to 4%, and considering the bond as a risk-free investment, initially it would sell for its face value. As the prevailing interest rates in the economy increase, the value of the bond would decrease from its original price to make it attractive to investors since they can now find other bonds with higher interest rates. Consequently, a bondholder would have to sell it for less than the original price of $10,000 to match the new market interest rate.