Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds? Group of answer choices The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments. The State of California bonds are in small dollar amounts. The State of California bonds have a shorter maturity. The State of California pays back its previous bonds ahead of schedule.

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10 January, 21:13

Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds? Group of answer choices The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments. The State of California bonds are in small dollar amounts. The State of California bonds have a shorter maturity. The State of California pays back its previous bonds ahead of schedule.

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Mcneil · Answer 1

The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments.

Explanation:

Businesswise, it is known that a bond's future cash payments will not change, but the market interest rates will change frequently. The change in the market interest rates will cause the bond's present value or price to change. Example could be if a bond promises to pay 6% interest annually and the market rate is 6%, the bond's price should be the same as the bond's maturity value. However, if the market rate increases to 7%, and an existing bond is promising to pay only 6%, the 6% bond will not be worth its face value or maturity value.

For it to be sold, the price will have to be less than the maturity amount. However, if the market rates drop to 5%, an existing bond that is promising to pay 6% will be very attractive. As a result, this bond will sell for more than its maturity value.