(Solved): P4-15 (similar To) Question Help Perpetuities. The Canadian Government Has Once Again Decided To Iss ...
P4-15 (similar to) Question Help Perpetuities. The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 4%. What should this consol bond sell for in the market? What if the interest rate should fall to 3%? Rise to 5%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise?
Expert Answer
Current selling price of the bond = perpetual interest payment/current discount rate Current selling price of the bond = $50/0.04 = $1,250 If interest rate fall to 3% pric