Question

1000 1. Suppose a coupon pays pays a person 1000 dollars each year starting im- mediately this year for n periods (only). If the interest rate is 4 per cent (which is used as a discount rate), its present value is V = 1000+ (1004) + 10004)2 + ... + (1+2.009) m-1. Compute the present value of the coupon that pays 1000 dollars each year forever starting immediately this year. 1000 1000

Answer 1

The coupon pays a person $1,000 each year, that starts from now.

It means $1,000 now ans $1,000 each year thereafter.

Interest = 4%

Calculate the present value of the coupon if you receive the 1,000 forever.

So, the life is infinity.

Here we have to calculate capitalized cost.

Capitalized Cost = Annual Payments / Interest Rate

In this case Capitalized Cost = $1,000 + $1,000 / 0.04 = $1,000 + 25,000 = $26,000

Present Worth = $26,000