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
A) decreased from $1000 to $500.
B) increased from $1000 to $2000.
C) increased from $500 to $2000.
D) decreased from $2000 to $1000
The price of a bond is inversely related to its interest rate. As the interest rate decreases, the price of the bond increases.
Therefore, the correct answer is:
C) increased from $500 to $2000.
something isn't right.
You're right, I apologize for the incorrect answer. Let's reassess the question.
To find the price of the bond, we can use the formula:
Price = Interest / Interest Rate
Initially, the bond pays an interest rate of 10 percent, which would be 0.10 as a decimal. So, the initial price would be:
Price = $100 / 0.10 = $1000
After the interest rate drops to 5 percent (0.05 as a decimal), we can calculate the new price:
Price = $100 / 0.05 = $2000
Therefore, the correct answer is:
B) increased from $1000 to $2000.
To determine the price of the bond, we need to consider the bond's interest rate and the current interest rate.
Given that the bond pays a yearly interest rate of $100, we can assume that the bond has a face value of $1000 (since the annual interest rate is 10%).
To calculate the price of the bond at the current interest rate of 5%, we need to discount the future cash flows of the bond. We can use the formula:
Price of the bond = Annual interest payment / Current interest rate
Plugging in the values:
Price of the bond = $100 / 5% = $100 / 0.05 = $2000
Therefore, the correct answer is B) increased from $1000 to $2000.
To find the price of the bond, we can use the formula for the present value of a bond:
Price = (Annual Interest Payment) / (Discount Rate)
Since the annual interest payment is $100 and the interest rate has decreased from 10% to 5%, the discount rate is now 5%. Plugging these values into the formula:
Price = $100 / 5% = $2000
Therefore, the price of the bond has increased from $1000 to $2000.
The correct answer is B) increased from $1000 to $2000.