Answered: What is the value of this perpetuity?…

What is the value of this perpetuity? 5-year bond with a coupon rate of 4% has a face value of $1000. What is the annual interest payment?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4MC

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Suppose that the constant and perpetual cash flow is $1,000 and the discount rate is 10%. What is the value of this perpetuity?

5-year bond with a coupon rate of 4% has a face value of $1000. What is the annual interest payment?

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