Question

The Cheltenham Company has a semi-annual coupon bond outstanding. A decrease in interest rates will have which one of the following effects on the bond?

	A.	decrease the coupon rate
	B.	increase the coupon rate
	C.	increase the time to maturity
	D.	decrease the market price
	E.	increase the market price

Answer 1

Solution:-

Ans:- E) Increase the market price

Reason:-

i) The coupon rate is fixed throughout the life of bond it does not change .

ii)Time to maturity is not affected by the change in the interest rate.

iii)When the interest rate decreases , the required rate of return of the decreases . There is the inverse relation between the required rate of return and bond market price. Hence when interest rate decreases the required rate of return decreases in turn the market price of the bond increases.

Please feel free to ask if you have any query in the comment section.