Question

Enron bonds mature in 12 years and have a coupon rate of 6.00%. If the market...

Enron bonds mature in 12 years and have a coupon rate of 6.00%. If the market rate of interest increases, then the:

A. Coupon rate will also increase.

B. Current yield will decrease.

C. Yield to maturity will be less than the coupon rate.

D. Market price of the bond will decrease.

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Answer #1

Coupon rate is decided at the time coupon is issued and it is fixed for entire periods of a bond.

Current yield and yield to maturity increase with market interest rate but bond price decreases.

Market price of the bond comprise of present value of all cash flow expected to generated. If market rate increases present value of periodic coupon payments along with present value of face amount decreases. Therefore, the price of bonds falls down.

Hence option “D. Market price of the bond will decrease” is correct answer.

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