Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond
A) falls to $750.
B) stays at $1,000.
C) rises to $1,080.
D) rises to $1,250.

Question

Quizplus · Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual coupon payment by the market interest rate. Here, the annual coupon payment is 10% of $1,000, which is $100. With the market interest rate falling to 8%, the price of the bond rises to $100 / 0.08 = $1,250.

Suppose a Perpetuity Bond with a Face Value of $1,000