6. Perpetuities

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.

The present value of a perpetuity is calculated by dividing the amount of the payment by the investors opportunity interest rate.

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.

In a perpetuity, returnsin the form of a series of identical cash flowsare earned.

Your grandfather wants to establish a scholarship in his fathers name at a local university and has stipulated that you will administer it. As youve committed to fund a $10,000 scholarship every year beginning one year from tomorrow, youll want to set aside the money for the scholarship immediately. At tomorrows meeting with your grandfather and the banks 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 scholarships 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.