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

The price of a zero-coupon bond can be calculated as: 
Price = Face Value / (1 + r)^n 
where r is the interest rate and n is the number of years until maturity.

At 10% interest rate, the price of the bond would be: 
Price = 1,100 / (1 + 0.1)^1 = $1,000

At 8% interest rate, the price of the bond would be: 
Price = 1,100 / (1 + 0.08)^1 = $1,018.52

Therefore, the bond price increases from $1,000 to $1,018.52 when the interest rate decreases from 10% to 8%. Therefore, the correct answer is A.

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