Question

British government 3.8% penalties once paid 53.8 interest each year forever. Another bond. 2.38 properties. paid $230 a year forever.

A. What was the value of 3.8% properties if the long-terin interest rate was 5.8% ? Note: Round your answer to 2 decimal places.
B. What was the valie of 23 perpetual? Note: Round your answer to 2 decimal places.

Answer 1

The present value calculation formula is used to determine the value of bonds paying a fixed interest indefinitely. For a bond paying $53.8 a year at a 5.8% interest rate, the present value is approximately $927.59. A bond paying $230 a year at the same interest rate has a present value of approximately $3,965.52.

Step-by-step explanation:

To answer these questions, we need to use the formula for calculating the present value of a perpetuity. A perpetuity is a type of bond or investment that pays a fixed amount of interest indefinitely. The formula for the present value (PV) of a perpetuity is PV = C / r, where C is the annual payment and r is the annual interest rate (expressed as a decimal).

A. For question A, the annual payment from the 3.8% penalties is $53.8, and the long-term interest rate is 5.8%. Using the formula, the present value of the 3.8% penalties is PV = 53.8 / 0.058, which equals approximately $927.59 when rounded to two decimal places.

B. For question B, since '23 perpetual' seems like a typo, let's assume the content loaded British government bond pays $230 a year forever. Using the same formula with the annual payment of $230 and the same interest rate, we get PV = 230 / 0.058, which equals approximately $3,965.52 when rounded to two decimal places.