- +1-530-264-8006
- info@tutorsglobe.com

18,76,764

Questions

Asked

21,311

Experts

9,67,568

Questions

Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment2015 © Tutors Globe. All rights reserved.

## Value of a Bond or Perpetuity

The Value of a Bond or Perpetuity:One important use of discounting is to determine the value of bonds and perpetuities.

Bond - A debt security issued by a government or a firm where the purchaser lends the issuer a lump sum amount of money today in return for a promise from the issuer to pay a finite stream of future payments.

Coupon - The annual interest payment on a bond.

Perpetuity - A debt security where the purchaser lends the issuer a lump sum amount of money today in return for a promise from the issuer to pay a fixed amount of income to the purchaser forever.

To determine the value of a bond to its buyer, we calculate the present value of the payments stream. Suppose, for example, a bond is sold for $1,000 and pays a coupon of $100 per year for each of the next 10 years and a principal repayment in the tenth year of $1,000.

At a discount rate of zero, the present value of the bond will be equal to PV =10($100) + $1,000 = $2,000 . As the discount rate increases above zero, the present value will continuously decline. Using Equations (3) and (5), we can simplify the calculation of the present value of the bond as follows:

$100/r : PV of an annual payment of $100 forever with the first payment being made in one year (from Eq.(3)) $100/r(1+ r)10 : PV of the payments that would be made from t =11 to t = ∞ on a bond that pays a $100 coupon forever.

Therefore the first two terms on the right hand side of the above calculation measure the present value of the 10 years of coupon payments on the bond. And the third term of the above calculation is the PV of the principal repayment that is received in 10 years.

Now, if the purchaser of the bond has a 5% discount rate the present value of the bond is:

• To find the present value of a perpetuity which beginning in year 1 pays $1000 per year forever, use Equation (3) to calculate:

• Government and corporate bonds are sold in the bond market in the same way that shares of stock are sold in the stock market. Buyers and sellers agree to exchange a bond at an equilibrium price p. The yield on a bond is simply the rate of return on the market price (market value) of the bond. The face value of the bond equals the principal payment to the owner when the bond reaches maturity. To determine the yield or rate of return on a bond, we rewrite Equation (1) in the following form:

Buyer knows bond price (p), the coupon payments (the values of xi for all i), and the principal payment; therefore, the only unknown is the yield or rate of return of the bond.

Latest technology based Microeconomics Online Tutoring AssistanceTutors, at the

www.tutorsglobe.com, take pledge to provide full satisfaction and assurance inMicroeconomics helpviaonline tutoring. Students are getting 100% satisfaction byonline tutorsacross the globe. Here you can get homework help for Microeconomics, project ideas and tutorials. We provide email basedMicroeconomics help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Microeconomics. ThroughOnline Tutoring, you would be able to complete your homework or assignments at your home. Tutors at theTutorsGlobeare committed to provide the best qualityonline tutoringassistance forMicroeconomics Homework helpandassignment helpservices. They use their experience, as they have solved thousands of the Microeconomics assignments, which may help you to solve your complex issues of Microeconomics.TutorsGlobeassure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide thehomework helpas per the deadline or given instruction by the student, we refund the money of the student without any delay.