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Perpetual bond cash flows

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Reference no: EM132004202

Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.

A perpetual bond pays coupons of 4% every year on a face value of $1,000. The rate of return on the bond is 9.40% every year. What is the price of the bond?

Hint: Use the perpetuity formula. Remember the rate of discount and rate of return are one and the same thing.

Reference no: EM132004202

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