Question:

Two weeks ago you purchased a government bond for $1150 that pay $100 per annum for each of the next five years. The market price of the bond has just increased to $1250. A Possible reason for this is:

a) The face value of a bond has been increased

b) The bond is perceived by the market to be more risky now than before.

c) Interest rates, in general, have decreased

d) None of the above

Answer:

PV = PMT/R x (1 1/(1+R)^N) + FV/(1+R)^N

THEN = If R decreases --> PV increases

Therefore, the answer is D

Can you please explain why the answer is D by, explaining what the formula is and how it is constructed, and why if R decrease, then PV increases.

Thanks :)