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Consols
- A bond that pays coupons forever.
- These bonds never mature so the investor never receives the face value.
- These bonds are treated as perpetuities when solving for their value.
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Example: Perpetual Bonds (Consols)
Assuming the YTM on a consol is 6% and that a bond has a face value of $1,000 with a coupon rate of 5%. What is the bond's price?
Practice: Perpetual Bonds (Consols)
An investor has the option between two bonds:
Bond A: 7% bond, F = 1,000, 10 year maturity, coupons paid semi-annually.
Bond B: 7% consol, F = 1,000, coupons paid semi-annually.
If the YTM on bonds is currently 8%, what is the difference between the price of the two bonds?
Round your work to at least 4 decimal places and your final answer to 2 decimal places.