Suppose a bond sells for $2, 000 and pays $200 per year in interest.What will happen to the current interest rate if the price of the bond changes to $1, 800?
A)It decreases by 10 percentage points.
B)It increases by 10 percentage points.
C)It remains unchanged.
D)It increases by 1 percentage point.
E)It decreases by 1 percentage point.

Question

Quizplus · Accepted Answer

The current interest rate is calculated as the annual interest payment divided by the bond's price. Initially, the rate is $200/$2,000 = 10%. If the bond price drops to $1,800, the rate becomes $200/$1,800 = 11.11%. The interest rate increases by approximately 1 percentage point.

Suppose a Bond Sells for $2, 000 and Pays $200