If the rate of interest increases from 8 percent to 10 percent, the holder of a perpetuity which yields $100 a year forever receives a capital:
A)loss of $40.
B)loss of $50.
C)gain of $50.
D)loss of $250.
E)gain of $250.

Question

Quizplus · Accepted Answer

To calculate the present value of a perpetuity, we divide the annual payment by the interest rate. At an 8% interest rate, the present value of the perpetuity is $100/0.08 = $1250. If the interest rate increases to 10%, the present value of the perpetuity would be $100/0.10 = $1000. Therefore, the holder of the perpetuity would experience a loss of $1250 - $1000 = $250.

If the Rate of Interest Increases from 8 Percent to 10