The yield for a perpetuity bond is determined by the simple formula:Yield= Interest payment divided by price of bond.

1. Suppose that actions taken by the Fed cause interest rates in the economy to fall by 2%. How will this affect the price of the bond that still pays $40 a year in interest?
2. Now suppose that one purchases a new $1,000 perpetuity bond at the lower interest rate. What will the annual interest payment be equal to?
3. If interest rates were to rise back to the original level determined in part (a), how will that affect the price of the new bond purchased in part (c)?