Final answer:
A 10-year coupon bond with a face amount of $1000 would pay the purchaser $80 per year until maturity at an 8% coupon rate. If interest rates rise to 12% with only one year left to maturity, the bond becomes less attractive and its price will be lowered below $1000.
Step-by-step explanation:
The characteristics of a 10-year coupon bond with a face amount of $1000 can be analyzed by considering its coupon rate, risk, and potential price changes based on interest rates. The coupon rate of 8% means that the bond will pay the purchaser $80 per year until maturity, when the final interest payment will be made and the original $1000 will be repaid.
If the interest rates prevailing in the economy rise to 12% and there is only one year left to the bond's maturity, the bond becomes less attractive as investors can find other bonds that pay a higher rate. To incentivize investors to buy the 8% bond, the bond seller will lower its price below its face value of $1000.