Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720.If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.
A)increase;15 percent
B)increase;17.5 percent
C)decrease;7.5 percent
D)decrease;10 percent
E)increase;13 percent

Question

Quizplus · Accepted Answer

The interest rate is calculated as the annual interest payment divided by the bond's price. Initially, the interest rate is $90/$720 = 12.5%. If the bond price falls to $600, the new interest rate is $90/$600 = 15%.

Suppose the Interest Rate on a Bond Is 12