Keep the Highest: 7 Attempts 9. Perpetuities Perpetuities are also called annuit
ID: 2814154 • Letter: K
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Keep the Highest: 7 Attempts 9. Perpetuities Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of Aa Aa perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. 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. 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 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 $20,000 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 earn 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 earn 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 earned on the account and the presentExplanation / Answer
Answer a.
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.
In a perpetuity, returns – in the form of a series of identical cash flows – are earned.
Answer b.
Annual Cash Flow = $20,000
Annual Interest Rate = 5.00%
Amount need to deposit = Annual Cash Flow / Annual Interest Rate
Amount need to deposit = $20,000 / 0.05
Amount need to deposit = $400,000
Answer c.
Annual Cash Flow = $20,000
Annual Interest Rate = 4.25%
Amount need to deposit = Annual Cash Flow / Annual Interest Rate
Amount need to deposit = $20,000 / 0.0425
Amount need to deposit = $470,588
Answer d.
This suggests there is inverse relationship between the interest rate earned on the account and the present value of the perpetuity.
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