Question

In: Economics

Suppose that you’ve just received some bonds from your crazy uncle Leroy. The first bond pays...

Suppose that you’ve just received some bonds from your crazy uncle Leroy. The first bond pays the holder
of it $110 in exactly one year’s time. The second bond is a forever bond. It will pay $5 every year forever
starting in one year’s time. The interest rate is 10%. What is the PDV of the two bonds?

Solutions

Expert Solution

PDV of first bond = F / (1 + i)n

                            = 110 / (1 + 0.10)1

                            = 110 / 1.10

                            = $100

PDV of second bond = A(P/A, i , n)

                                  = A(P/A, i, infinity)

                                  = A / i

                                  = 5 / 0.10

                                  = $50

Rahul Sunny answered 6 months ago
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