Question

Problem 6-13 Pricing Consol Bonds (LO2) Perpetual Life Corp. has issued consol bonds with coupon payments of $60. (Consols pay interest forever and never mature. They are perpetuities.). If the required rate of return on these bonds at the time they were issued was 6%, at what price were they sold to the public?

Answer 1

Answer:

The bonds were sold at $1,000 to yield as the market rate at the time.

Explanation:

To determinate the value of the bonds we divide the annual cash received on the coupon payment against the market rate at the time:

The formula for the value of a perpetuity is as  follows:

$\frac{C}{r} =Value$

60 / 0.06 = 1,000