Asked by Tempest Hansen on May 11, 2024
Verified
You own a bond issued by the Canadian Pacific railroad that promises to pay the holder $100 annually forever. You plan to sell the bond five years from now. If similar investments yield 8% at that time, how much will the bond be worth?
A) $918.79
B) $1,014.28
C) $1,250.00
D) $1,489.42
E) $1,958.20
Canadian Pacific Railroad
A historic railway company in Canada, established in the 19th century, playing a significant role in the development of the nation's commerce and industry.
Yield
The income return on an investment, such as the interest or dividends received, often expressed as a percentage of the investment's cost or current value.
- Identify financial tools or agreements that qualify as a perpetuity.
- Evaluate the value of escalating annuities and perpetuities by applying specified financial equations.
Verified Answer
LH
Lidia HurezanMay 15, 2024
Final Answer :
C
Explanation :
The bond is a perpetuity, paying $100 annually. The value of a perpetuity is calculated as the annual payment divided by the yield (i.e., $100 / 0.08 = $1,250). The time at which you plan to sell the bond does not affect its value in this calculation.
Learning Objectives
- Identify financial tools or agreements that qualify as a perpetuity.
- Evaluate the value of escalating annuities and perpetuities by applying specified financial equations.
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