Question

1. a bond investor purchases a bond today at a 3% apr. what would most likely happen to that bond if interest rates drop by 1% tomorrow?

the price of the bond would go up.
the price of the bond would go down.
there would be no change in the bond price or return.
the bond would now have an effective return of 2% apr.

Explanation:

Bonds have an inverse relationship with market interest rates. When market interest rates fall, existing bonds with higher fixed coupon rates (like this 3% APR bond) become more valuable to investors, so their market price increases. The bond's stated APR doesn't change, and rates dropping don't lower its effective return to 2%.

Answer:

A. The price of the bond would go up.