Answer:
PV=1,333
Explanation:
the key to answer this question is to remember the formula for calculating a perpetuity:
[tex]PV=\frac{C}{i}[/tex]
where PV is the present value, C is the regular payment and i is the interest rate charged, so in the initial case we have:
[tex]1,000=\frac{40}{i}[/tex]
solving i we have:
i=40/1,000
i=0.04
so if the i rate falls 1 % the price of the bond will be
[tex]PV=\frac{40}{0.03}[/tex]
[tex]PV=1,333[/tex]
it could sound rare that if the rate falls the present value increases but keep in mind that the more rate the less price is a relation between rates and bonds prices
