A bond with 10 years until maturity, an 8 percent coupon, and an 8 percent yield to maturity increased in price to $1,107.83 yesterday.What apparently happened to interest rates?

Question

Quizplus · Accepted Answer

The increase in the bond's price indicates that interest rates decreased. Using the BAII Plus calculator, we can solve for the new yield to maturity (YTM) by inputting the current bond price (PV) as $1,107.83, the coupon payment (PMT) as $80 (8% of the $1,000 face value), the number of periods (N) as 10, and the face value (FV) as $1,000. Solving for the YTM, we get 6.5%. Subtracting the new YTM from the initial YTM of 8% gives us a decrease of 1.5%. Therefore, the answer is D, rates decreased by 1.5%.

A Bond with 10 Years Until Maturity, an 8 Percent