A bond that pays a yearly interest rate of $100 is for sale. The interest rate was 10 percent and now is 5 percent. The price of the bond has

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The price of a bond is inversely related to the interest rate. When the interest rate decreases from 10% to 5%, the bond's price increases because the fixed interest payment becomes more attractive. Originally, at a 10% interest rate, a $100 yearly interest payment implies a $1000 bond value ($100 / 0.10). When the interest rate drops to 5%, the same $100 yearly payment implies a $2000 bond value ($100 / 0.05).

A Bond That Pays a Yearly Interest Rate of $100