Calculate the present value of a government security that promises to pay $100 p.a.forever,assuming an interest rate of 11% per annum.
A)$90
B)$1100
C)$909
D)Infinity.

Question

Quizplus · Accepted Answer

The present value of a perpetual bond can be calculated by dividing the annual payment by the interest rate. Therefore, the present value of the bond would be $100/0.11 = $909. Option A) is not correct because it is lower than the calculated present value. Option B) is not correct because it is higher than the calculated present value. Option D) is not correct because the present value is a finite number, not infinity.

Calculate the Present Value of a Government Security That Promises