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7 May, 06:16

Which of the following statements is true?

a. A coupon bond is a debt security with only one payment.

b. The amount invested in financial security is referred to as perpetuity.

c. A coupon bond is a debt security that pays interest forever and never repays principal.

d. The present value of perpetuity varies directly with the annual repayments.

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Answers (1)
  1. 7 May, 06:38
    0
    d. The present value of perpetuity varies directly with the annual repayments.

    Explanation:

    A perpetuity is a security or bond which pays a fixed amount of cash flow at a fixed interval forever. So the amount it pays stays the same and it keeps paying for ever. The formula to find the present value of a perpetuity is

    Cash flow of perpetuity/Interest Rate

    So if the annual payment is 100 and the interest rate is 5% the present value of the annuity is

    100/0.05=2,000

    If we keep the interest rate the same at 5% and increase the cash flow by 100 to 200 the new present value of the perpetuity is

    200/0.05=4,000

    This proves that the present value of a perpetuity varies directly with the annual repayments or cash flow of perpetuity.
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