The British government has a consol bond outstanding paying pound £300 per year forever. Assume the current interest rate is 8% per year. a. What is the value of the bond immediately after a payment is made? b. What is the value of the bond immediately before a payment is made?
Question
The British government has a consol bond outstanding paying pound £300 per year forever. Assume the current interest rate is 8% per year. a. What is the value of the bond immediately after a payment is made? b. What is the value of the bond immediately before a payment is made?
Solution
a. The value of a perpetuity (a bond that pays forever) can be calculated using the formula:
Value = Payment / Interest Rate
In this case, the payment is £300 and the interest rate is 8% (or 0.08 in decimal form). So, the value of the bond immediately after a payment is made would be:
Value = £300 / 0.08 = £3750
b. The value of the bond immediately before a payment is made is the same as the value immediately after a payment is made, because the payment does not affect the value of the perpetuity. Therefore, the value of the bond immediately before a payment is also £3750.
Similar Questions
A bond with a par value of £1,000 makes annual coupon payments of 6%. If investors holding the bonds require an 8% rate of return, and the bond has 5 years left to maturity what is the current bond price, to the nearest whole pound?£681£1,084£1,123£920£870
A government bond with a face value of $1,000 was issued eight years ago and there are twelve years remaining until maturity. The bond pays annual coupon payments of $90, the coupon rate is 9% pa and rates in the marketplace are 9.5% p.a. What is the value of the bond today?Group of answer choices$965.08$931.86$1,600.97$1,040.05$1,000.00
A government bond with a face value of $500,000 was issued eight years ago and there are seven years remaining until maturity. The bond pays semi-annual coupon payments of $22,500, the coupon rate is 9% p.a. paid twice yearly and rates in the marketplace are 8% pa compounded semi-annually. What is the value of the bond today? Group of answer choices $526,407.81 $516,831.86 $408,888.52 $500,000.00 $529,130.74
A Rs. 100 par value bond, bearing a coupon rate of 11.25% will mature after 7.5 years. What is the value of the bond, if the discount rate is 12.25% and coupons are paid semi-annually?
A $1000 face value bond, with a 6.9% coupon rate paid semi-annually and maturing in three years, is currently yielding 8.1% in the market. What is the current price of the bond?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.