Original practice · fully worked
Original variant: compare monthly and quarterly perpetuity prices
At an annual effective yield of 12%, two perpetuities-due each pay 500 per payment date. One pays monthly and the other pays quarterly, both beginning today. Determine the ratio of the monthly perpetuity's price to the quarterly perpetuity's price.
- A
2.7421 - B
2.8845 - C
2.9719 - D
3.0000 - E
3.0816
Answer and calculation
The price ratio is one minus the quarterly discount factor divided by one minus the monthly factor. Factoring gives 1 plus v-month plus v-month squared = 2.9719, choice C.
Setup
Setup
Derive monthly and quarterly discount factors from the same annual effective yield.
vm=(1.12)−1/12 Model
Model
Write the two perpetuity-due prices and cancel the common payment.
PqPm=1−vm1−vq Compute
Compute
Factor one minus v-month cubed.
PqPm=1+vm+vm2=2.971890 Answer
Answer
The monthly price is 2.9719 times the quarterly price, choice C.
Pm/Pq≈2.9719(C)