Question

Imagine that the government decided to fund its current deficit of $431 billion dollars by issuing a perpetuity offering a 4% annual return. How much would the government have to pay bondholders each year in perpetuity?

Answer 1

Answer:

Thus, the government would have to pay bondholders $ 17.24 billion dollars each year in perpetuity.

Explanation:

current deficit$431 billion dollars

To find:

The amount that the government have to pay bondholders each year in perpetuity.

sol-

So, to find the periodic cash payment made on an annual basis, we will use the following formula,

present value of = peroidic cash payment/interest discount rate

$431 dollar = annual cash payment/ 4%

$431 dollar = annual cash payment/4/100

annual cash payment=($431 billion dollar ) multiply 4/100

annual cash payment= $1724 billion dollar/100

annual cash payment= $17.24 billion dollar

Thus, the government would have to pay bondholders $ 17.24 billion dollars each year in perpetuity.