Attempts: 9. Perpetuities Perpetuities are also called annuities with an extende

Question

Attempts: 9. Perpetuities Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of Average: 17 Aa Aa 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. 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. D A perpetuity continues for a fixed time period. Your grandfather wants to establish a scholarship in his father's name at a local university and has stipulated that you will administer it. As you've committed to fund a $5,000 scholarship every year beginning one year from tomorrow, you'll want to set aside the money for the scholarship immediately. At tomorrow's meeting with your grandfather and the bank's representative, you will need to depositIAOPIEMGO(rounded to the nearest whole dollar) so that you can fund the scholarship forever, assuming that the account will earn 5.50% per annum every year. Oopsl The bank representative just reported that he misquoted the available interest rate on the scholarships account. Your account should earn 3.50%. The amount of your required deposit should be revised to This suggests there is value of the perpetuity relationship between the interest rate earned on the account and the present

Explanation / Answer

1)

In a perpetuity, returns-in the form of series of identical cash flows- are earned

The present value of perpetuity is calculated by dividing the amount by investors oppurtunity interest rate

2)

You will need to deposit = 5,000 / 0.055 = 90,909

Revised deposit = 5,000 / 0.035 = 142,857

Inverse relationship

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