The value of the bond

1. You are offered the opportunity to receive $1000 per year forever, starting in one year. If your discount rate is 5%, what is this offer worth to you?

2. You have $100,000 to donate to your university. You want to endow a perpetual scholarship that makes its first payment in one year. If the university’s discount rate is 4%, how large will be the annual scholarship payment?

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?

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

Solution:

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