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value of consol bond

Loserboi
Posts: 1,232
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10/15/2012 9:01:01 PM
Posted: 4 years ago
Hey guys I need a little help on my homework.

What is the value of a consol bond before any payment?

This bond pays 400 a year forever and has an interest rate of 8%
Loserboi
Posts: 1,232
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10/15/2012 10:51:28 PM
Posted: 4 years ago
At 10/15/2012 10:28:01 PM, darkkermit wrote:
Value of consol bond = (Cash flow)/(interest rate) = 400/.08 = $5000.

I tried that the answer was wrong.
That was my answer for after the first payment
darkkermit
Posts: 11,204
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10/15/2012 10:58:09 PM
Posted: 4 years ago
At 10/15/2012 10:51:28 PM, Loserboi wrote:
At 10/15/2012 10:28:01 PM, darkkermit wrote:
Value of consol bond = (Cash flow)/(interest rate) = 400/.08 = $5000.

I tried that the answer was wrong.
That was my answer for after the first payment

what's the answer then? Also doesn't the price remain the same regardless of how many payments have been made. The only thing that would effect its price is changes in the interest rate, not change in time.
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johnnyboy54
Posts: 6,362
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10/15/2012 11:21:52 PM
Posted: 4 years ago
At 10/15/2012 10:58:09 PM, darkkermit wrote:
At 10/15/2012 10:51:28 PM, Loserboi wrote:
At 10/15/2012 10:28:01 PM, darkkermit wrote:
Value of consol bond = (Cash flow)/(interest rate) = 400/.08 = $5000.

I tried that the answer was wrong.
That was my answer for after the first payment

what's the answer then? Also doesn't the price remain the same regardless of how many payments have been made. The only thing that would effect its price is changes in the interest rate, not change in time.

From what I know about consols, I don't see how that answer can be wrong.
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