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---.

Question

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---.

GPT 3.5 · Answer

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.

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---.

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---.