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Delvig [45]
4 years ago
13

What is the price of a perpetual bond that pays a $45 per year into perpetuity, and has a 3.5% yield to maturity (YTM)

Business
1 answer:
snow_tiger [21]4 years ago
6 0

Answer:

Price =$1,285.71

Explanation:

<em>A perpetual bond is that which pays a fixed amount of interest income for the foreseeable future. It issuer does not always have an obligation for redemption under the terms of loan contract.</em>

The price of   perpetual bond can be determined as the present value of a perpetuity. An perpetuity is an annuity that pays a fixed amount of cash flow for a certain number of years

PV = A/r

PV- price of bond- ?

A- annual interest - 45

r- Yield to maturity- 3.5%

Price = 45/0.035=1,285.714

Price =$1,285.71

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