Question

Imagine that the government decided to fund its current deficit of $431 billion dollars by issuing a perpetuity offering a 4% annual return. How much would the government have to pay bondholders each year in perpetuity? Express your answer in billions of dollars. (Hint: The $431 billion is just the present value of these cash flows at a discount rate of 4%.) *Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Answer 1

Answer:

$17.24 billions

Explanation:

Given that

Current deficit = $431 billion

Annual rate of return = 4%

As we know that

The value of perpetuity = Contribution made on annual basis ÷ Annual rate of return

$431 billion = Contribution made on an annual basis ÷ 4%

So, the Contribution made on annual basis is

= $431 billion × 4%

= $17.24 billions

Hence, all the given information is considered.