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) rises to $1,250.
B) falls to $750.
C) rises to $1,080.
D) stays at $1,000.

Question

Quizplus · Accepted Answer

The price of a perpetuity bond is calculated as the annual coupon payment divided by the market interest rate. The annual coupon payment is $1,000 * 10% = $100. When the market interest rate falls to 8%, the bond price is $100 / 0.08 = $1,250.

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