Assume that Shyam holds a perpetual bond that generates an annual payment of Rs.500 each year. He believes that the borrower is creditworthy and that an 8% interest rate will be suitable for this bond. The present value of this perpetuity is

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Rs.5620

Rs.2650

Rs.6520

Rs.6250

answer is B.

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Detailed Solution

PV of perpetuity = $\frac{Annual Payment / Cash flow}{Interest rate / yield}$
$\begin{array}{l} = \frac{500}{\frac{8}{100}} = \frac{500}{0 .08} \\ = ₹ 6250 \end{array}$

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