a) The Canadian government has once again decided to issue a consol (a bond with neverending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year), but it will never retum the principal. The current discount rate for Canadian government bonds is 6.5%. What should this consol bond sell for the market? What if the discount should fall to 4.5%. Based on your answers, what is the relationship between discount rate and bond price?

b)You consider to buy a house but are not sure how big a mortgage you can afford. To keep you mortgage expense no more than 38% of you monthly after-tax income, you figure out that you can handle monthly mortgage payments of $1,855 for a 30-year loan at an annual interest rate of 3.85%. How big of a mortgage can you afford?