Consider a perpetual bond that pays $150/yr to its owner. What would be the price of the consol if the interest rate is 2 percent?

Question

Quizplus · Accepted Answer

A perpetual bond, also known as a consol, is a bond that pays a fixed amount of interest per year and has no maturity date. The price of a consol can be calculated by dividing the annual interest payment by the interest rate.

In this case, the annual interest payment is $150 and the interest rate is 2% or 0.02 in decimal form. Therefore, the price of the consol would be:

Price = $150 / 0.02 = $7,500

So, the correct answer is A) $7,500.

Consider a Perpetual Bond That Pays $150/yr to Its Owner