Final answer:
If a bond's yield-to-maturity is equal to its nominal yield, it is offered at its face value (b. 100). Should market interest rates increase, the bond's price will decrease to remain competitive. An investment of $964 at 12% return is equivalent to a $1,080 return after one year, setting the maximum price an investor would pay for a $1,000 bond in such market conditions.
Step-by-step explanation:
If a bond's yield-to-maturity equals its nominal yield, then the bond is being offered at its face value which is option b. 100. This scenario implies that the bond is priced at par, meaning the market's required return on the bond matches the bond’s coupon rate.
Furthermore, if interest rates in the economy rise to 12%, and the bond in question is only paying an 8% coupon with one year left to maturity, the bond becomes less attractive. Consequently, the bond's price will drop below its face value to compensate for the lower interest rate it offers relative to the new market rate.
Therefore, using a present value calculation, if you could receive $1,080 one year from now from an alternative investment at a 12% return, you would invest $964 today (since $964 * 1.12 = $1,080). This indicates that you should not pay more than $964 for the original $1,000 bond because investing $964 with a 12% return will yield the same amount after one year.