Let the effective annual rate be 5 percent (i.e., r = .05) for all maturities. a

Question

Let the effective annual rate be 5 percent (i.e., r = .05) for all maturities.

a. Calculate the present value of a perpetuity that makes annual payments of $1,000,000 every year forever, with the next payment being made exactly one year from now.

b. Calculate the present value of a perpetuity that makes annual payments of $1,000,000 every year forever, with the next payment being made exactly ten years from now.

c. Calculate the present value of an annuity that makes annual payments of $1,000,000 every year for 9 years, with the next payment being made exactly one year from now.

d. Calculate the present value of a perpetuity that makes a payment of $1,000,000 every 6 months, with the next payment being made in exactly 6 months from now. Hint: Use the standard perpetuity formula but let the

Explanation / Answer

a.1000000/.05 =20000000 b.20000000/1.05^10=12278265 c.1000000*7.1078=7107800 d.1000000/.025=40000000 e.1000000*6.1446/1.05^2=5573333 f.1000000*6.1446/1.05=5852000

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