Question

When the market interest rate of a bond decreases,

A) Its price increases.
B) Its maturity period extends.
C) Its coupon rate decreases.
D) Its current yield increases.
E) Its yield to maturity increases.

Answer 1

When the market interest rate of a bond decreases, the price of the bond increases. This is because existing bonds with higher coupon rates become more attractive to investors.

Step-by-step explanation:

When the market interest rate of a bond decreases, the price of the bond increases. This is because when interest rates fall, existing bonds with higher coupon rates become more attractive to investors. As a result, investors are willing to pay a higher price for these bonds to receive the higher coupon payments. On the other hand, if the market interest rate increases, the price of the bond decreases as existing bonds with lower coupon rates become less attractive compared to newly issued bonds with higher coupon rates.