Which of the following statements is most correct?

A) The market value of a bond usually approaches its par value as the bond approaches maturity.
B) If the government unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
C) A bond's price depends on the issuer's financial condition as well as the general level of interest rates.
D) Statements a. and c. are correct.
E) All of the statements are correct.

Question

Tanya James · Accepted Answer

Final Answer : D, Explanation :  A) is correct because as a bond nears its maturity, its price tends to move closer to its par value, reflecting the decreasing impact of interest rate changes over time. C) is also correct because a bond's price is influenced by both the issuer's creditworthiness, which affects the perceived risk of default, and the prevailing interest rates, which affect the relative attractiveness of the bond's fixed payments. B) is incorrect because if inflation is expected to increase, interest rates are likely to rise to combat inflation, which would decrease bond prices since bond prices move inversely to interest rates.

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