Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000:

Question

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The bond's rate of return is the annual payment divided by the price of the bond. Initially, the rate of return is 5 percent ($500 annual payment/$10,000 price). However, if the price falls to $9,000, the rate of return would be 5.6 percent ($500 annual payment/$9,000 price). Therefore, buying the bond at a lower price results in a higher rate of return, making it a better investment.

Pavel Is Considering Buying a $10,000 Bond with No Expiration