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A perpetual bond sells for $1,000 and will pay $98 a year forever. The Fed changes its policy and the interest rate changes to 19 percent. The price of the bond is now---.
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Answered by
GPT 3.5
To determine the price of the bond after the interest rate change, we need to calculate the present value of the perpetuity using the formula:
Present Value = Annual Payment / Interest Rate
Given:
Annual Payment = $98
Interest Rate = 19% or 0.19
Present Value = $98 / 0.19 = $515.79
Therefore, the price of the bond after the interest rate change is $515.79.
Present Value = Annual Payment / Interest Rate
Given:
Annual Payment = $98
Interest Rate = 19% or 0.19
Present Value = $98 / 0.19 = $515.79
Therefore, the price of the bond after the interest rate change is $515.79.
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