Answer:
present value of perpetuity = $1111.11
present value of perpetuity = $588.23
if interest rate fall price go up and interest rate rise price go down
Explanation:
given data
bond pay = $50
solution
first we find present value of perpetuity for 6.5 % that is
present value of perpetuity = ..............1
present value of perpetuity =
present value of perpetuity = $769.23
now present value of perpetuity for 4.5%
so from equation 1 we get
present value of perpetuity =
present value of perpetuity = $1111.11
and
now present value of perpetuity for 8.5%
so from equation 1 we get
present value of perpetuity =
present value of perpetuity = $588.23
so
here we know that current price of perpetuity & discount rate is inversely proportional
so current present value is find by divide cash flow by discount rate
here discount rate higher value of perpetuity
so if interest rate fall price go up and interest rate rise price go down