00:01
So what do we know here, right? we know there's this bond that pays $500.
00:06
So the value of this bond is equal to $500 plus $500 plus $500 and so on and so on and so forth forever, right? but those payments are not all worth the same amount.
00:21
$500 a year from now in an economy where interest is 10 % is not worth $500.
00:27
It's worth $10 % less.
00:30
Right? because if you had the money today, you could earn 10 % interest.
00:37
So when you wait a year for the money, you are foregoing 10 % interest, right? so if the interest rate is 10%, the price of the bond is going to be worth a whole lot less than at 6%.
00:51
Right? so the second year payment is worth 10 % less twice.
00:56
And the third year's payment is worth 10 % less three times, so on and so on and so forth.
01:05
If you sum this up, this is a geometric sequence, so it can be summed up with the expression first over one minus ratio.
01:13
So the first term here is 500 over 1 minus 1 .1.
01:17
1 minus the ratio is 1 over 1 .1 .1...