Consider a perpetuity paying $100 a year. If the relevant discount rate is 8 percent, what is the value of the perpetuity today? Using Equation 4.10 we have:

Now suppose that the discount rate falls to 6 percent. Using Equation 4.10 the value of the perpetuity is:

Note that the value of the perpetuity rises with a drop in the discount rate. Conversely, the value of the perpetuity falls with a rise in the discount rate.

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PV = $100 .08 = $1,250