If the going market rate, rd, declines what happens to the price of existing bonds? The...
If the going market rate, rd, declines what happens to the price of existing bonds?
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The price of existing bonds decline |
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The price of existing bonds is unaffected by rd. |
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The price of existing bonds is unchanged. Only newly issued bonds are affected. |
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The price of esisting bond increases. |
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The price moves around randomly. |
Homework Answers
The price of existing bond increases.
Explanation:
Their is a inverse relationship between interest rate and bond price.
If market interest rates decrease, the value of a bond will increase since the bond's stated fixed interest payments will be greater than the amounts available in new bonds issued at current market interest rates. (However, be aware that a bond's call price can limit the amount of increase in market value.)
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