Question: Which are issued by a government to raise money. An individual who buys a $1000 bond gives the government $1000 and in return receives a fixed sum of money, called the coupon, every six months or every year for the life of the bond. At the time of the last coupon, the individual also gets back the $1000, or principal.
In the nineteenth century, the railroads issued 100-year bonds. Consider a $100 bond which paid $5 a year, starting a year after it was sold. Assume interest rates are 4% per year, compounded annually.
(a) Find the present value of the bond.
(b) Suppose that instead of maturing in 100 years, the bond was to have paid $5 a year forever. This time the principal, $100, is never repaid. What is the present value of the bond?