Final answer:
To calculate the current price of a bond when its interest rate is less than the market interest rate, use the present value formula. The buyer will not pay more than the present value of the future payments. In this case, the bond price would be $964.
Step-by-step explanation:
To calculate the current price of the bonds when its interest rate is less than the market interest rate, we need to determine the present value of the bond's cash flows. In this case, the bond pays an interest of $1,080 in the last year and also repays the principal amount of $1,000. Using the present value formula, we can calculate the price of the bond:
PV = Future Value / (1 + Yield to Maturity)n
where PV is the present value, Future Value is the expected payment, Yield to Maturity is the current yield, and 'n' is the number of years until maturity.
Given that the interest rates are now 12%, we know that we could invest $964 in an alternative investment and receive $1,080 a year from now. Therefore, the most a buyer is willing to pay for the bond is $964.