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 principal amount of a perpetuity is repaid as a lump-sum amount. A perpetuity continues for a fixed time period. In a perpetuity, returns-in the form of a series of identical cash flows-are earned. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate. A local bank's advertising reads: "Give us $40,000 today, and we'll pay you $600 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit? O 1.50% o 2.40% O 2.10% O 1.20% 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 $60,000. This revision, which will rate earned on your deposited funds, will adjust your earned interest rate to the interest

Explanation / Answer

1.

2. Annual interest rate , r = Payment amount, pmt / Present Value , PV

Present value , Pv = $ 40000

Payment emount, pmt = $600

So, the annual interest rate, r = $600/ $40000/ = 1.50%

3.

If the present value ia $60000,

Annual interest rate, r = $600 / $60000 = 1.0%

So, This revision, which will decrement the interest rate earned on your deposited funds, will adjust your interest rate to 1.0%

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