Question

A prestigious investment bank designed a new security that pays a quarterly dividend of $3.70 in perpetuity. The first dividend occurs one quarter from today.

What is the price of the security if the annual percentage rate is 3.3 percent compounded quarterly?

Answer 1

the price of the security will be $448.485

Explanation:

Annual rate of interest = 3.3%

then Interest rate per quarter (r) will be = 0.033/4

= 0.00825

= 0.825%

now it is given that

Cash flows in the first quarter, C1 = $3.70

Then Present value of perpetuity = C1 /r

= $3.70/ 0.825%

= $448.485

Therefore, the price of the security will be $448.485