Question

Please help this is for a grade!

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. In a perpetuity, returns-in the form of a series of identical cash flows-are earned. O A perpetuity continues for a fixed time period. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate. O A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. 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 $25,000 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 (rounded to the nearest whole dollar) so that you can fund the scholarship forever, assuming that the account will earn 5.00% per annum every year. 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 relationship between the interest rate earned on the account and the present value of the perpetuity.

Answer 1

Option a , c  and d are correct
Option b is incorrect because perpetuity does not have fixed period, infact it is for infinite period.

You will need to deposit =Annual Scholarship money/Required Rate =25000/5% =500,000

The amount of your required deposit should be revised to =25000/4.25% =588235.29. This suggest there is inverse relationship between the interest rate earned on the account and the PV of the perpetuity.