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 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 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. A local bank's advertising reads: "Give us $35,000 today, and we'll pay you $200 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit? 0.51% 0.919 0.57% 0.80%

Answer 1

The characteristics of perpetuity are

• A perpetuity is a series of regular 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.

PV of perpetuity = Annual Cash flow/annual interest rate

35000 = 200/annual interest rate

annual interest rate = 200/35000

= 0.00571428571

= 0.57%

Interest rate when PV is 52500 is

200/52500

0.0038095238

.38% (ie: interest rate falls)