Question

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.​)?

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%