An increase in the interest rate paid by a business borrower will reduce the firm's default risk, all other considerations remaining constant. In general, when interest rates increase, the prices and values of financial assets decrease. The higher the interest rate on a firm's debt, the lower will be the firm's profits, all other considerations remaining constant. A sharp increase in interest rates will decrease the price of bonds and increase the interest income available to new bondholders. This will increase the demand for bonds compared to the demand for stocks, all other considerations remaining constant. To further examine the relationship between interest rates and the price of financial assets, consider the effect of a change in an investor's required return, or opportunity cost, on the price of a financial asset. Three years ago, Brooke purchased a perpetuity that agrees to pay her and her heirs $250 per month forever. At the time of purchase, Brooke was expecting to earn an annual return of 5.00%, but in the intervening years, the economy and the available investment alternatives have changed. In today's market, it is now reasonable to anticipate an annual return of 7.25%. By how much would you expect the value of Brooke's perpetuity to change from when she purchased it until today? $60,000 $41,379 $-18,621 $-1,552