A$\_$ Suppose you have a long$-$term bond that pays you $$1000$ a year forever. The interest rate is $2\%.$ What is that bond worth? The rate of interest increases to $4\%.$ What is the bond worth now?

$B-$ Consider a university that is holding the bond in question $A$ as its cushion to make sure that it meets payroll, because it can't borrow money. It needs the cushion because its payroll is $$100,000$ a year, and by law you must pay its professor $($small college with only one professor$)$ that amount every January $1.$ The college doesn't charge tuition and its only source of revenue is its basketball team, which nets $$120,000$ in a good year, but only $$60,000$ in a bad year. $($Any left over from a good year gets immediately soaked up the next year by an increase in the coach's salary.$)$ The probability of next year being a good year is $75\%.$

If the rate of interest is $2\%,$ can the university make payroll in a bad year?

If the rate of interest is $4\%,$ can the university make payroll in a bad year?

If you were the professor, what would you say when the rate of interest rose from $2\%$ to $4\%?$ What would you tell your spouse if your family depended on your income?