Question

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Berstein discusses government perpetuities issued by governments in medieval Europe. A perpetuity is a type of a bond that promises to pay a fixed payment periodically (e.g., every six months) but never matures. The payment is defined as a percent of a fixed, stated par. For example, a 5% perpetuity with annual payments and par of $100 is a promise by the issuer to pay the holder 5% of $100, or $5, each year. This payment is called the coupon Consider a Venetian prestiti (discussed on pages 10-12) with par value of 10,000 ducats, a coupon rate of 5%, and annual coupons. Marco Polo buys one prestiti when the annual market rate is 5.5%. A year later, war breaks out and the market rate shoots up to 8%. If Marco has to sell his prestiti (e.g., to finance his upcoming trip to China), how much would he lose on his investment? (Ignore any coupons that he collects.) Express your answer in ducats; round to the nearest ducat.