If market interest rates rise significantly, what will normally happen to the market price of an existing fixed-rate bond?
Correct answer: C. It will generally fall
- A. It will rise proportionately
- B. It will remain unchanged
- C. It will generally fall
- D. It will become equal to face value
Explanation
Existing fixed-rate bonds become less attractive when new bonds offer higher interest rates. Their market prices therefore generally fall so that their effective return becomes competitive.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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