to fund it wars against Napoleonm the British governmnet sold consol bonds. They

Question

to fund it wars against Napoleonm the British governmnet sold consol bonds. They were referred to as "perpetuities" because they would pay 3 ever year in perpetuity(forever)If citizens could purchase a consol for 25, what would its annual interest be? What if the price were 50? 100? bonds are known as fixed income securitites because the future payments that they will make to investors are fixed by bond agreement inadvance. Do the interest rates of bonds and other investments that offer fixed future payments vary postively or inversely with their current prices?

Explanation / Answer

pv =S3/(1+r)^n from n=0 to infiity PV = 3/(1-(1+r)) = 3/r 25 = 3/r r = 3/25 = .12 = 12% for PV = 50 r = 3/50 = .06 =6% for 100 r = 3/100 = .03 = 3% aas it is evident from the above example fixed future payments vary inversely with their current prices

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