When the interest rate in the economy was 10%, the price of a bond with no expiration date and pays a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6%, 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 bond is calculated as the annual interest payment divided by the interest rate. When the interest rate is 6%, the price is $500 / 0.06 = $8,333.33.

When the Interest Rate in the Economy Was 10%, the Price