Question

When the coupon rate on newly issued bonds ________ relative to older, outstanding bonds, the market price of the older bond ________(A) increases; falls in the primary market decreases;(B) rises in the secondary market decreases;(C) falls in the secondary market increases;(D) falls in the secondary market

Answer 1

Answer:

The Answer is B) Rises in the secondary market decreases.

                                 

Explanation:

When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, the market price of the older bond rises in the secondary market.

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate

For example, a $2,500 bond with a coupon of 10% pays $250 a year. Typically these interest payments will be semiannual, meaning the investor will receive $250 twice a year.

If two bonds offer different coupon rates while all of their other characteristics (e.g., maturity and credit quality) are the same, the bond with the lower coupon rate generally will experience a greater decrease in value as market interest rates rise.

Bonds offering lower coupon rates generally will have higher interest rate risk than similar bonds that offer higher coupon rates.

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