Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually. His required rate of return on this investment is 14.25%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.
A) $83,470
B) $170,877
C) $95,621
D) $121,709
A perpetuity will grow at the rate of 5% per year. One year from the date of purchase, it will pay $50,0000. If the appropriate discount rate is 10%, what is the value of the perpetuity?
A) $1,000,000
B) $500,000
C) $5,000,000
D) $1,050,000
Your rich great, great aunt just passed away at the age of 91. She liked you more than she let on and left you in her will. You will receive 100 British bonds that pay interest forever. The amount of annual interest payments that you will receive is $5,000. If you could invest your money at 4.25%, how much are these bonds worth today?
A) $64,480
B) $197,250
C) $250,000
D) $117,647
E) $55,000
A bond paying interest of $120 per year forever is an example of a perpetuity.
Answer: TRUE
The formula for calculating the present value of a growing perpetuity is PV = Payment period 1/(i-g)
Answer: TRUE
A perpetuity is an investment that continues forever but pays a different dollar amount each year.
Answer: FALSE
The present value of a $100 perpetuity discounted at 5% is $1200.
Answer: FALSE
All else constant, an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.
Answer: TRUE
