2. Perpetuities Aa Aa Perpetuities are also called annuities with an extended, o
ID: 2615465 • Letter: 2
Question
2. Perpetuities Aa Aa Perpetuities are also called annuities with an extended, or unWmited, life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. In a perpetuity, returns-in the form of a series of identical cash flows-are ea med. A perpetuity continues for a fixed time period. A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate. 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 $10,000 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 deposit can fund the scholarship forever, assuming that the account will eam 5.00% per annum every year. (rounded to the nearest whole dollar) so that you Oops! The bank representative just reported that he misquoted the available interest rate on the scholarship's account. Your account should eam 4.25%. The amount of your required deposit should be revised to This suggests there is value of the perpetuity. relationship between the interest rate eamed on the account and the present Flash Player MAC 30,0,0,113Explanation / Answer
1. Statement 1,3 and 4 are true.
A perpetuity is a stream of equal payments that occur at regular and ?xed intervals and that are expected to continue forever. A perpetuity's present value is calculated as the sum of the discounted, or present value (PV), of each of its future cash ?ows.
2. PV of perpetual cash flows = Perpetual Cash Flows / Discount rate
= $10,000 / 0.05 = $200,000
3. PV of perpetual cash flows = Perpetual Cash Flows / Discount rate
= $10,000 / 0.0425 = $235,294.12
4. inverse; These values indicate that there is an inverse relationship betWEEn the interest rate and the discounted value of the scholarship fund.
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