Perpetuities are also called annuities with an extended, or unlimited, life. Bas
ID: 2821485 • Letter: P
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. A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. 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 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 $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 5.50% 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 3.50%. The amount of your required deposit should be revised to $428,572 $857,144 $628,572 $571.429 relationship between the interest rate earned on the account a $8 This suggests there is value of the perpetuity.Explanation / 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.
Answer b.
Annual Payment = $20,000
Interest Rate = 5.50%
Amount need to deposit = Annual Payment / Interest Rate
Amount need to deposit = $20,000 / 0.055
Amount need to deposit = $363,636
Answer b.
Annual Payment = $20,000
Interest Rate = 3.50%
Amount need to deposit = Annual Payment / Interest Rate
Amount need to deposit = $20,000 / 0.035
Amount need to deposit = $571,429
Answer c.
This suggests there is inverse relationship between the interest rate earned on the account and the value of the perpetuity
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