Compute the price of a $ 6,775 par value, 16 percent coupon consol, or perpetual bond (i.e., coupon interest payment is a perpetuity), assuming that the yield to maturity on the bond is 8 percent.
Please explain
To compute the price of a perpetual bond, you can use the formula for the present value of a perpetuity. The formula is:
Price = Coupon / Yield to Maturity
In this case, the coupon is 16 percent of $6,775, which is $1,084. The yield to maturity is 8 percent.
Let's substitute these values into the formula:
Price = $1,084 / 0.08
Now, divide $1,084 by 0.08:
Price = $13,550
Therefore, the price of a $6,775 par value, 16 percent coupon consol, or perpetual bond with a yield to maturity of 8 percent is approximately $13,550.