Suppose That a Bond Promises to Pay Its Holder $100

Multiple Choice

Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond

A) rises from 8 percent a year to 10 percent a year.
B) falls from 10 percent a year to 6 percent a year.
C) falls from 10 percent a year to 8 percent a year.
D) rises because the bond becomes a better investment.
E) does not change because the purchaser buys the bond knowing that interest rates will be adjusted.