How much would you pay for a perpetual bond that pays an annual coupon of $100100 per year and yields on competing instruments are 2020 %? you would pay $ nothing. (round your response to the nearest penny. ) ?

Question

Mathematics

Kody Dean

29 January, 04:02

How much would you pay for a perpetual bond that pays an annual coupon of $100100 per year and yields on competing instruments are 2020 %? you would pay $ nothing. (round your response to the nearest penny. ) ?

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Keely Parrish · Answer 1

The present value of a perpetual bond is = annual coupon payment/discount rate

The discount rate = yield = 20% = 0.2

Annual coupon payment = $100

Present value of the bond = 100/0.2 = 500

So the present value of the bond is the value that you would end up paying for the bond.

Hence you would pay $500.00 for a bond that pays an annual perpetual coupon of $100 with a yield of 20%