Final answer:
If interest rates decrease, the price of a bond will generally increase since its fixed interest payments become more attractive relative to the market. No-risk bonds sell for their face value initially, but fluctuate with market interest rates. A bond's price drops below face value when market rates rise, and increases above face value when market rates fall.
Step-by-step explanation:
When interest rates change, the price of bonds will adjust to reflect the new market conditions. If your required return decreases from 8% due to a decrease in interest rates, you would expect to pay more than $10,000 for the bond. This is because the bond's fixed interest payments are now more attractive compared to the new, lower interest rates available in the market.
In a situation where the bond carries no risk, it would normally sell for its face value. However, if the market interest rates rise, such as going from 8% to 12%, the previously issued bond at a lower interest rate becomes less attractive because investors can find new bonds that pay a higher interest rate. To make the lower-interest bond appealing, the price will be reduced below its face value. Conversely, when interest rates fall, previously issued bonds with higher interest rates become more valuable and will thus sell for more than their face value.