Perpetuities are also called annuities with an extended, or unlimited, life. Bas
ID: 2816532 • Letter: P
Question
Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of perpetuities, complete the following exercises. Which of the following are characteristics of a perpetuity? Check all that apply The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less on the discounted value of its more distant (in the future) cash flows. A perpetuity is a stream of unequal cash flows. A perpetuity is a stream of regularly timed, equal cash flows that continues forever. The value of a perpetuity cannot be determined. A local bank's advertising reads: "Give us $25,000 today, and we'll pay you $400 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit? 2.56% o 1.44% 1.60% 0 1.28% 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 $37,500. This revision, which will rate earned on your deposited funds, will adjust your earned interest rate to the interest Flash Player WIN 31,0,0,108 Q3 3.34.1 2004-2016 Aplia. All rights reserved. Grade It Now Save & Continue 2013 Cengage Learning except as noted. All rights reservedExplanation / Answer
Answer a.
The current value of a perpetuity is based more on the discounted value of its nearer cash and less on the discounted value of its more distant cash flows.
A perpetuity is a stream of regularly timed, equal cash flows that continues forever.
Answer b.
Cost of Perpetuity = $25,000
Annual Payment = $400
Annual Interest Rate = Annual Payment / Cost of Perpetuity
Annual Interest Rate = $400 / $25,000
Annual Interest Rate = 1.60%
Answer c.
Cost of Perpetuity = $37,500
Annual Payment = $400
Annual Interest Rate = Annual Payment / Cost of Perpetuity
Annual Interest Rate = $400 / $37,500
Annual Interest Rate = 1.07%
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