Question

The British government has a consol bond outstanding that pays ₤100 in interest each year. Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment one year from now, then the value of the consol bond is closest to:

A) ₤1,000
B) ₤1,100
C) ₤2,100
D) ₤2,000

Answer 1

The value of the consol bond is ₤2,000.

Step-by-step explanation:

To calculate the value of the consol bond, we can use the formula for the present value of a perpetuity. The formula is: Value = Interest / Interest Rate.

In this case, the bond pays ₤100 in interest each year, and the current interest rate is 5%. Plugging these values into the formula, we get: Value = ₤100 / 0.05 = ₤2000.

Therefore, the value of the consol bond is closest to option D) ₤2,000.