asked 196k views
5 votes
What is the price of a perpetual bond that pays a $45 per year into perpetuity, and has a 3.5% yield to maturity (YTM)

asked
User Tamilan
by
7.9k points

1 Answer

4 votes

Answer:

Price =$1,285.71

Step-by-step explanation:

A perpetual bond is that which pays a fixed amount of interest income for the foreseeable future. It issuer does not always have an obligation for redemption under the terms of loan contract.

The price of perpetual bond can be determined as the present value of a perpetuity. An perpetuity is an annuity that pays a fixed amount of cash flow for a certain number of years

PV = A/r

PV- price of bond- ?

A- annual interest - 45

r- Yield to maturity- 3.5%

Price = 45/0.035=1,285.714

Price =$1,285.71

answered
User CmdrSharp
by
7.9k points
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