Question: The Canadian Government has once again decided to issue a
The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year) but never return the principal. The current discount rate for Canadian government bonds is 6.5%. What should this bond sell for in the market? What if the interest rate should fall to 4.5%? Rise to 8.5%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise?
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