Question

A consol bond promises to pay $3000 each year, forever, starting next year. If the nominal interest rate is 2.5%, the present discounted value of this consol is

Answer 1

Answer:

$120,000

Explanation:

since consol bonds are bonds that pay perpetual coupons, therefore, we can use the perpetuity formula to determine their present value:

present value = annual coupon / interest rate = $3,000 / 2.5% = $3,000 / 0.025 = $120,000

consol bonds should not have maturity date, that means that they should yield a coupon payment forever