The British government has a consol bond outstanding paying \( £ 100 \) per year forever. Assume the current interest rate is \( 12 \% \) per year. a. What is the value of the bond immediately after a payment is made? b. What is the value of the bond immediately before a payment is made? a. What is the value of the bond immediately after a payment is made? The value of the bond immediately after a payment is made is \( £ \) b. What is the value of the bond immediately before a payment is made? The value of the bond immediately before a payment is made is \( £ \square \). (Round to the nearest pound.) nearest pound.) v

To determine the values, we can use the formula for a consol bond, which is a type of perpetuity. The value of a consol can be calculated using the following formula: \[ \text{Value} = \frac{C}{r} \] where \( C \) is the annual payment and \( r \) is the interest rate. 1. **Immediately after a payment is made**: The bond has just paid \( £100 \), which means the next payment will occur at the end of the year. The value immediately after the payment is made is: \[ \text{Value} = \frac{100}{0.12} = £833.33 \] Rounded to the nearest pound, this is \( £833 \). 2. **Immediately before a payment is made**: This is just the value we computed, but since the next payment is approaching, we don't have that payment included in this valuation. Thus, the value immediately before the payment is made would be: \[ \text{Value} = \frac{100}{0.12} = £833.33 \] But since we haven’t received that payment yet, we must account for one less payment till the next one is made, thus evaluating: \[ \text{Value before payment} = \text{Value after payment} + £100 = £833 + £100 = £933 \] Final rounded values are: a. The value of the bond immediately after a payment is made is \( £833 \). b. The value of the bond immediately before a payment is made is \( £933 \).