A perpetuity bond is sold with the following terms: coupon rate = 5% and face value = $1,000. Five years after the bond is issued, the market rate of interest on similar bonds is 6%. Which statement accurately describes the situation if the bond is sold in the secondary bond market at that time (five years after its initial issue)?

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Quizplus · Accepted Answer

The price of a perpetuity bond is calculated as the annual payment divided by the market interest rate. Here, the annual payment is $50 (5% of $1,000), and the new market rate is 6%. So, the price is $50 / 0.06 = $833.33. The bond's price adjusts to reflect the higher market interest rate, not the coupon rate or face value.

A Perpetuity Bond Is Sold with the Following Terms: Coupon