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?
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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.
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