Suppose a bond with no expiration date has a face value of $10,000 and annually

Question

Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $950. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown.

Instructions: For bond prices, round to the nearest dollar. For interest yield, round your answer up to two decimal places.

Explanation / Answer

$500 Face - Yields 40% $10,000 Face - Yields 2% $50,000 Face - Yields 0.4% A bond with no expiry date is simply a perpetuity where the cash flows remain the same every year forever. You can check the math as follows: The Formula for Present Value of a Perpetuity: PV = C/r PV = Present Value C = Cash Flow r = Interest Rate (annual) Bond Price Interest Yield, % $ 8,500 $ 10 $10,500 $11,500 $ 7.04

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