If the coupon payment decreases, what would you expect to happen to bond prices? A) You...

If the coupon payment decreases, what would you expect to happen to bond prices?

A) You would expect bond prices to increase because bond prices and interest rates are positively related.

B) You would expect bond prices to fall since bond prices are the sum of the present values of the future payments associated with the bond.

C) You would expect bond prices to increase because bond prices and interest rates are positively related.

D) Bond prices will be unaffected, so you should expect no change in bond prices.

Solutions

Expert Solution

Answer: Option B

Price of bond is present value of all cash flows - namely coupon and face value that are expected to be received from the bond investment. When the coupon payment decreases, the PV of this cash flow would also decrease and hence the price of the bond would also be low.

jeff jeffy answered 1 year ago

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