Coupon amount=C=$100
Expected return=r=10%
Fair price of bond, P=Present value of perpetual coupon payments
P=C/r=100/10% =$1000
If competing yield changes to 8%, price of bond is
P=C/r=100/8% =$1250
Current yield=C/current price=100/1250=8%
Current price=S=$1250
Purchase price=P=$1000
Coupon payment received=C=$100
Holding period return=[(S-P)+C]/P=[(1250-1000)+100]/1000=35.00%
How much would you pay for a perpetual bond that pays an annual coupon of $100...
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