Question

A perpetuity pays $170 per year and interest rates are 8.2 percent. How much would its value change if interest rates increased to 9.7 percent

Answer 1

$320.59 decrease

Step-by-step explanation:

The computation of the change in the value is shown below:

As we know that

The Value of perpetuity is

= Annual inflows ÷ interest rate

Current value is

= $170 ÷ 0.082

= $2,073.17

And,

New value is

= $170 ÷ 0.097

= $1,752.58

Now change in value is

= $2,073.17 - $1,752.58

= $320.59 decrease

We simply applied the above formula