Assume that you purchased a $1,000 perpetual bond and the interest rate on that bond declined from 5 percent to 2 percent.Thus,

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When interest rates fall, bond prices rise. In this case, the bond price would increase by $1,500, from $1,000 to $2,500. This is because the bond is now paying a higher interest rate than similar bonds on the market, so investors are willing to pay more for it. The bondholder could sell the bond at a capital gain because the bond is now worth more than what was paid for it. If this was anticipated, the speculative demand for money would fall because investors would be more likely to buy bonds instead of holding cash.

Assume That You Purchased a $1,000 Perpetual Bond and the Interest