EC223 Study Guide - Quiz Guide: Zero-Coupon Bond, Mattress, Cash Flow
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Economics of the canadian banking and financial system. Read each part of the question very carefully. Derive the formula for calculating the price of a consol bond. The perpetuity or consol bond is a special type of coupon bond which pays a fixed coupon, , for an indefinite period in the future. The face value or the principal is never redeemed. The years to maturity date of the consol bond, n, extends to infinity. The price or present value of perpetuity or a consol, cp , is: 1 i c (1) where ci is the yield to maturity of the perpetuity (consol) and c is fixed annual coupon. So, the formula for calculating the price or present value of a consol or a perpetuity is: The formula, equation (2), shows that as the interest rate or the yield to maturity of the perpetuity rises, the price of a perpetuity or a consol falls.
