Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond A. rises to $1,080.
B. falls to $750.
C. stays at $1,000.
D. rises to $1,250.

rises to $1,250.

Explanation:

From the information given,

Annual coupon, C will be calculated as:

= $1000 × 10%

= $1000 × 0.1

= $100

Market Interest rate, i = 8%

The price of the bond will be:

= Annual coupon/Interest rate

= $100/8%

= $100/0.08

= $1250

Therefore, the price of the bond rises to $1,250. The correct option is D.

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