Consider a zero-coupon bond with a $1,100 payment in one year. Suppose the interest rate decreases from 10% to 8%. The price of this bond:

Question

Quizplus · Accepted Answer

Using the formula for the present value of a zero-coupon bond, we have:
PV = FV / (1 + r)^t
When r = 0.1 and t = 1, PV = 1,000.
When r = 0.08 and t = 1, PV = 1,018.28.
Therefore, the price of the bond increases from $1,000 to $1,018.28. The correct choice is A.

Consider a Zero-Coupon Bond with a $1,100 Payment in One