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British government 3.3% perpetuities pay £3.3 interest at the end of each year forever. Another bond, 1.8% perpetuities, pays £1.80 a year forever.

a. What is the value of 3.3% perpetuities if the long-term interest rate is 5.3%? (Round your answer to 2 decimal places.) Perpetuity value £
b. What is the value of 1.80% perpetuities? (Round your answer to 2 decimal places.) Perpetuity value £

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Answer:

Explanation:

Perpetuity is a time value of money concept where cashflows occur indefinitely; the recurring payments go on forever.

The formula for finding the present value of these perpetually recurring cashflows is as follows;

PV = CF/ r

whereby,

CF = Cashflow = £3.3

r = rate = 3.3% or 0.033 as a decimal

so PV = 3.3 / 0.033

PV = £100.00

If the rate is 1.80% or 0.018 and recurring CF is £1.80, then PV would be;

PV = 1.80 / 0.018

PV = £100.00

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