Great Britain issued perpetual bonds for the first time in 1751. The bonds were

Question

Great Britain issued perpetual bonds for the first time in 1751. The bonds were used to consolidate debt that Britain had accumulated through various empire building efforts. These bonds are known as consols, shortened from consolidation annuities, and they pay perpetual interest and have no maturity date. The British government has restructured these perpetual bonds over the centuries and they are now known as ‘consolidate stock’ and they pay 2.5% of par to the holder.

What is the value of £10,000 face value of consols assuming a required return of 4%? What is the value of £10,000 face value of consols assuming a required return of 4%?

Problem 2:

1. How much will you have to contribute every year in order to accumulate $250,000 prior to retirement? Assume an interest rate of 6% and retiring after 30 years

2. How much will you be able to withdraw annually from this account for the 20 year period? Assume an interest rate of 6%.

Explanation / Answer

Problem 1 Value of 10000 Face value Interest Payable =10000*2.5% 250 Required Return 4% Value of the Face value =250/0.04 6250 Problem 2 Ans 1 Present Value of 250000 @6% for 30 years Present value factors = 1/(1+6%)^30 0.17411013 Multiplying it by 250000 =250000*0.17411 43527.5 Annual contribution to accumalate 250000 =pmt(6%,30,-43527.50,0) Annual Contribution   $3,162.23 Ans 2 Annual Withdraw for 20 years =pmt(6%,20,-250000,0) $21,796.14

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