If the interest rate is r and will remain r forever, then a bond that will pay 95 dollars a year forever, starting one year from now, is worth how much today?

A) 95/(1  r) dollars.
B) 95(1  r) dollars.
C) 95/r dollars.
D) 95/(1  r  r² ... rⁿ ...) dollars.
E) None of the above.

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Shelbi Chambers · Accepted Answer

Final Answer : C, Explanation :  The value of a perpetuity, which is a bond that pays a fixed amount forever, is calculated as the payment divided by the interest rate. Therefore, a bond that pays $95 a year forever, at an interest rate of r, is worth $95/r today.

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