6 . Perpetuities

Which of the following are characteristics of a perpetuity? Check all that apply.

1.The value of a perpetuity is a finite number.

2. A perpetuity is a stream of unequal cash flows.

3. The value of a perpetuity is equal to the sum of the present value of future cash flows.

4. A perpetuity is a stream of equal cash flows that continues forever.

5. The value of a perpetuity cannot be determined.

A local banks advertising states: Give us $1,000 today, and well pay you $100 every year forever. If you plan to live forever, what interest rate will you earn?

A) 1.50%

B) 10.00%

C) 8.20%

D) 12.50%

What is the value of the $100 every year forever if the expected return is 7.50%?

A)The present value of the bank deposit decreases to $850.00.

B) The present value of the bank deposit increases to $1,333.33.