Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a perpetuity bond with a face value of $1,000. If market interest rates rise to 8%, the bond price
A) falls to $700.
B) falls to $800.
C) falls to $875.
D) rises to $1,125.

Question

Quizplus · Accepted Answer

The bond price falls to $875 because the present value of the future coupon payments decreases as interest rates rise.

Assume Initially That Market Interest Rates Are 7% and the Bondholder