When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a ﬁxed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about
A) $4,700.
B) $5,030.
C) $7,128.
D) $8,333.

Question

Quizplus · Accepted Answer

The price of a perpetuity (a bond with no expiration date) is calculated by dividing the annual payment by the interest rate. When the interest rate falls to 6%, the price of the bond becomes $500 / 0.06 = $8,333.

When the Interest Rate in the Economy Was 10 Percent