Notice the golden relationship here, in fact,

the inverse relationship between interest rates and value.

Interest rates go up, values goes down, interest rates go down, values go up.

So for our example, first the console and the preferred stock that we talked about,

let's draw some timelines to visualize the information that I presented.

For the console, we're going to assume a $1,000 denomination for

each of those bonds that the Bank of England issued.

So on a timeline it might look something like this.

So we have time periods here.

We can continue these, remember this is a perpetuity where we have

equal time periods that go on indefinitely, forever.

So the denomination of the console is as we mentioned 1,000,

and the interest rate we said that the Bank of England was

paying is 3.52%, which multiplied by 1,000 gives

us the 35.2 pounds that each of these bonds was paying.

So this is the annuity, 35.2, 35.2, 35.2,

and so on and so forth, forever and ever, that the bondholder

would receive from the British government if they were to purchase the bond.

So what is the value of this bond?

Well, we can use our deceptively simple formula here.

The value of the bond is going to be equal to the annuity which we've defined as

35.2 pounds.

And the interest rate is the key question.

That of course is going to vary, it varies every day sometimes every hour.

Let's assume the interest rate is 5%.

If it's 5%, the value is going to work out to 704 pounds, okay?

Now you can see as I was mentioning this

fantastic relationship that we can observe right away.

If the interest rates decrease,

if the interest rates decrease down to let's say dramatically to 3%.

If the interest rates go down to 3%, the value will jump up a higher percentage,

in fact it works out to 1,733 pounds.

Let's use the same formula now for the preferred stock example.