Question

When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, what happens?

A) The market price of the older bond falls in the secondary market.
B) The market price of the older bond rises in the secondary market.
C) Older bonds can still be sold at their face value.

D) Older bonds will sell for more than their face value.

Answer 1

Option B

B) The market price of the older bond rises in the secondary market.

A coupon payment is a periodic payment on the bond. If it is higher, the return is higher, and the price is higher. It is lower the return is lower, and the price is lower. Older bonds are traded in the secondary market, and a new bonds are issued on the primary market. The older bonds coupon rate is higher than the new relationships relatively than the price of older bonds in the secondary market increases.