Question

A company is offering bonds which pay $100 per year indefinitely. If you require a 12 percent return on these bonds (that is, the discount rate is 12 percent), what is the value of each bond?

Answer 1

To calculate the value of each bond, use the present value formula: PV = C / r, where PV is the present value, C is the cash flow, and r is the discount rate. Each bond is worth $833.33.

To calculate the value of each bond, we need to use the present value formula. The formula is PV = C / r, where PV is the present value, C is the cash flow (in this case, $100), and r is the discount rate (12%).

So, PV = $100 / 0.12 = $833.33. Therefore, each bond is worth $833.33.