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Current value of the perpetual bond

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Reference no: EM131520238

Show the following: if inflation is 3 per cent per year and the bond's payments are fixed at $10, that the current value of the perpetual bond is $125 can be shown by:

i) by adjusting the $10 payment for inflation in each period and using a real discount rate of 5 percent. (Hint: this latter proof is easiest if you use the approximation [1+r][1+p^e] is approx. 1 + r + p^e for small values of r [the real interest rate] and p^e [ the expected inflation rate].)

Reference no: EM131520238

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