14 extra credit 5 points A 1000 perpetuity was purchased in

14) extra credit (5 points) A $1000 perpetuity was purchased in 1926 with a coupon rate of 5%. What is its value, if the market rate is 10 %? What is its value, if the market rate is 2%?

Solution

Value of perpetuity = Annual payment/Market rate of Return

Annual payment = 5% * $1000 = $50

Value of Perpetuity (rate = 10%) = 50/10% = $500

Value of Perpetuity (rate = 2%) = 50/2% = $2500