Suppose a perpetuity bond pays an interest of $40. The financial investor can earn a 5%...
Suppose a perpetuity bond pays an interest of $40. The financial investor can earn a 5% return elsewhere. What is the maximum amount buyers would be willing to pay for this bond?
Note: I think we have to find the perpetual bond first. Then calculate the yield of the bond then compare to the promised rate of return of other investment assets. However, I am still confused on how to carry out this question and what the actual answer is
Homework Answers
This question asks us to find the principal for which both bond yield and the alternative investment option equate, meaning:
p*0.05=40
or p=40*20=800
Thus, 800 is the maximum amount that a buyer shall be willing to pay for this bond
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