Answer to Question #99052 in Economics for Connor

Question #99052

Suppose you paid $1,000 for a perpetuity bond that pays $40 a year. Suppose the interest rate drop fall to 1%. What would be the price of the bond if it continues to pay $40 a year?

Expert's answer

If it continues to pay $40 a year, then it's present value is PV = D/r = 40/0.01 = $4,000.

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