Financial reporting analysis 5

Question
For analytical purposes what is the impact on the debt to equity ratio if the market rate of interest increases after the bond is issued ?
a. an increase
b. a decrease
c. no change

Explanation
an increase in the market rate will decrease the price of the bond for analytical purposes adjusting the bond liability to its economic value will result in a lower debt to equity ratio. (lower numerator and higher denominator)

Answer is B a decrease.
Plz help me in understanding the question.
I didn’t get it

You have issued debt worth $ 100 promising to pay a coupon of $8 annually when the market interest rate was 6%. Depending upon your rating the debt is more valuable for the bond holders because of the excess yield over the market interest rate. You know what your liability is. If the interest rate increases to 7% , your debt is no longer that valuable and hence you will record a mark down. This is an accounting effect.

A decrease in liability is a good thing to your balance sheet. Regardless at maturity you will still retire 100% Face Value

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