If a bond is issued when prevailing interest rates are

Q: Answer- If a bond is issued when prevailing interest rates are 8% at Rs.1,000 par value with a 8% annual co...

If interest rates drop to 6, the bond will continue paying out at 8, making it a more attractive option. Investors will purchase these bonds, bidding the price up to a premium until the effective rate on the bond equals 8. On the other hand, if interest rates rise to 10, the 8 coupon is no longer attractive and the bond price will decrease, selling at a discount until its effective rate is 8.

8% at Rs.1,000 par value with a 8% annual coupon. Which of the following is NOT correct?

A The bond will sell at discount when the interest rate will increase to 10% Correct Answer Incorrect Answer

B The bond will sell at premium when the interest rate will increase to 10% Correct Answer Incorrect Answer

C The coupon of the bond is 8% Correct Answer Incorrect Answer

D Face value of the bond is Rs.1000 Correct Answer Incorrect Answer

E All of the above are correct Correct Answer Incorrect Answer

Solution

If interest rates drop to 6%, the bond will continue paying out at 8%, making it a more attractive option. Investors will purchase these bonds, bidding the price up to a premium until the effective rate on the bond equals 8%. On the other hand, if interest rates rise to 10%, the 8% coupon is no longer attractive and the bond price will decrease, selling at a discount until it's effective rate is 8%.

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