If a bond pays a fixed return of $500 a year and the current interest rate has risen from 5 percent to 10 percent, then the bond price must have:
A)risen from $25 to $50.
B)fallen from $50 to $25.
C)risen from $5, 000 to $10, 000.
D)fallen from $10, 000 to $5, 000.
E)risen from $1, 000 to $5, 000.

Question

Quizplus · Accepted Answer

When interest rates rise, bond prices fall. The bond's fixed return of $500 is now less attractive compared to the new 10% interest rate, causing its price to decrease from $10,000 to $5,000.

If a Bond Pays a Fixed Return of $500 a Year