Question

How much would you pay for a perpetual bond that pays an annual coupon of $200 per year and yields on competing instruments are 20%? You would pay S(Round your response to the nearest penny) If competing yields are expected to change to 8%, what is the current yield on this same bond assuming that you paid $1,000? The current yield is % (Round your response to the nearest integer) If you sell this bond in exactly one year, having paid $1,000, and received exactly one coupon payment, what is your total return if competing yields are 8%? Your total return is % (Round your response to two decimal places)

Answer 1

You would pay $1000. Hence, the annual coupon is divided by the yield rate.Annual coupon is $200 and yield rate is 20%. Therefore, 200/0.20 =1000.

To know current yield, divide annual coupon ($200) by current perpetual bond price ($1000). Hence, $200/$1000=20%.