The yield for a perpetuity bond is determined by the simple formula:
A. The yield on a $1,000 perpetuity bond that pays $40 a year forever to the bondholder is h4XZagboIgc= percent.
B. Suppose that actions taken by the Fed cause interest rates in the economy to fall by 2%. How will this affect the price of the bond presented in part (a), that pays $40 per year in interest? The price of the bond would change to $W9ZYWUD5NT8aLa3R8qnWDQ==.
C. Now suppose that one purchases a new $1,000 perpetuity bond at the lower interest rate presented in part (b). The annual interest payment will be equal to $Tu9IG1n3UyE=.
D. If interest rates were to rise back to the original level determined in part (a), how will that affect the price of the new bond purchased in part (c)? The new price will be $poG0pQg2yAs=.