Suppose a perpetuity bond with a face value of $1,000 has a coupon rate of 8%. If market interest rates rise to 12%, the price of the bond:
A) rises to $1,120.
B) rises to $1,080.
C) falls to $666.67.
D) falls to $880.

Question

Quizplus · Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual coupon payment by the market interest rate. The annual coupon payment is $1,000 * 8% = $80. When the market interest rate rises to 12%, the price of the bond is $80 / 0.12 = $666.67.

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