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An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $190 annually if the next payment occurs one year from today? The market interest rate is 4.2 percent. (Round your answer to 2 decimal places. (e.g., 32.16)) Present value $

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Edufirst

Answer:

               [tex]\large\boxed{\large\boxed{\$ 4,523.81}}[/tex]

Explanation:

The price of a consol (a type of debt issued by the goverment) is the present value of all the future payments.

A constant payment forever is known as a constant annuity to perpetuity.

The price of a constant perpetuity is calculated with the formula:

      [tex]Price=C/r[/tex]

Where C is the constant payment, equal to $190 (annually forever), and r is the opportunity cost, which you assume to be equal to the market interest rate: r = 4.2%.

Substituting:

        [tex]Price=\$ 190/(4.2\%) =\$ 190/0.042=\$ 4,523.81[/tex]

According to the above equation, the present value of British consol is equal to $4,523.81.

What is the term constant payment about?

A constant payment forever is also known as a constant annuity to perpetuity. A perpetuity is set up in order to provide never ending payments.

Given Information:

  • C is the constant payment, equal to $190 (annually forever)
  • r is the opportunity cost= 4.2%.

The price of a consol (a type of debt issued by the government) is the present value of all the future payments.

The price of a constant perpetuity is calculated with the formula:

Price=C/r

Price=$190/4.2%

Price=$4,523.81

Learn more about payment, refer to the link:

https://brainly.com/question/15138283

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