What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%? O The coupon rate increases to 10%. O The coupon rate remains at 9%. O The coupon rate remains at 7%. O The coupon rate decreases to 8%.
What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%? O The coupon rate increases to 10%. O The coupon rate remains at 9%. O The coupon rate remains at 7%. O The coupon rate decreases to 8%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Question:**
What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%?
**Options:**
- The coupon rate increases to 10%.
- The coupon rate remains at 9%.
- The coupon rate remains at 7%.
- The coupon rate decreases to 8%.
**Explanation for Educational Website:**
This question involves understanding how bond coupon rates interact with market interest rates. The coupon rate is the fixed interest rate that a bond issuer agrees to pay annually, expressed as a percentage of the bond's face value. In this case, the bond has a face value of $1,000 and pays $70 in interest annually, which equates to a 7% coupon rate ($70/$1,000).
When market interest rates change, the coupon rate of an existing bond does not change because it is fixed at the time the bond is issued. Hence, regardless of whether market interest rates increase or decrease, the coupon rate will remain at 7%.
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