Question

6. The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year. a. What is the value of the bond immediately after a payment is made? (Answer: £2,500) b. What is the value of the bond immediately before a payment is made? (Answer: £2,600)

Answer 1

Answer:

A. £2,500

B. £2,600

Explanation:

a. Calculation for What is the value of the bond immediately after a payment is made

Present Value = 100/0.04

Present Value=£2,500

Therefore the value of the bond immediately after a payment is made is £2,500

b. Calculation for What is the value of the bond immediately before a payment is made

Present Value =£100 +£100/0.04

Present Value = £100+£2,500

Present Value = £2,600

Therefore the value of the bond immediately before a payment is made is £2,600