The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500. If the price of the bond falls to $3,000, then the effective interest rate yield to a new buyer of the bond is:

Question

Quizplus · Accepted Answer

The effective interest rate yield is calculated by dividing the annual interest payment by the current price of the bond.

At the original price of $5,000, the yield would be: 
$500 / $5,000 = 0.10 or 10%

At the new price of $3,000, the yield would be: 
$500 / $3,000 = 0.1667 or 16.67%

Therefore, the answer is B) 16.6 percent.

The Price of a Bond with No Expiration Date Is