Compute the present value of a perpetual bond that pays a monthly cash flow of $1,000 at an annual interest rate of 12 percent.
A) $8,333.33
B) $9,333.33
C) $100,000
D) $101,000

Question

Quizplus · Accepted Answer

The present value of a perpetual bond (or perpetuity) is calculated using the formula PV = PMT / i, where PMT is the periodic payment and i is the periodic interest rate. With a monthly cash flow of $1,000 and an annual interest rate of 12 percent (or 1 percent monthly), the calculation is $1,000 / 0.01 = $100,000.

Compute the Present Value of a Perpetual Bond That Pays