Final answer:
The interest rate decreases by 2 percentage points when the bond's price increases by $2,500, resulting in a new interest rate of 8%.
Step-by-step explanation:
The student asked about the effect on the interest rate when the price of a bond increases. For a bond with an original price of $10,000 and a fixed annual interest payment of $1,000, the initial interest rate is 10% (since 1,000 is 10% of 10,000). If the price of the bond increases by $2,500 to $12,500, the new interest rate is calculated by dividing the fixed interest payment by the new price, resulting in $1,000 / $12,500 = 0.08, or 8%. Therefore, the interest rate decreases by 2 percentage points from the original 10% rate to 8%, making option B (Decrease by 2 percentage points) the correct answer.