Perpetuities are also called annuities with an extended, or unlimited, life. Bas

Question

Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply The value of a perpetuity is equal to the sum of the present value of its expected future cash flows A perpetuity is a stream of unequal cash flows. The value of a perpetuity cannot be determined ? The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows A local bank's advertising reads: "Give us $35,000 today, and we'll pay you $200 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit? ? 0.68% ? 0.80% o 0.57% O 0.91% Oops! When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $52,500. This revision, which will rate earned on your deposited funds, will adjust your earned interest rate to the interest

Explanation / Answer

Answer a.

The value of a perpetuity is equal to the sum of the present value of its expected future cash flows.

Answer b.

Annual Payment = $200
Cost = $35,000

Annual Interest Rate = Annual Payment / Cost
Annual Interest Rate = $200 / $35,000
Annual Interest Rate = 0.0057 or 0.57%

Answer c.

Annual Payment = $200
Cost = $52,500

Annual Interest Rate = Annual Payment / Cost
Annual Interest Rate = $200 / $52,500
Annual Interest Rate = 0.0038 or 0.38%

This revision, which will decrease the interest rate earned on your deposited funds, will adjust your earned interest rate to 0.38%

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