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 value of a perpetuity cannot be determined.

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

The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.

A perpetuity is a stream of regularly timed, equal cash flows that continues forever.

A local banks advertising reads: Give us $15,000 today, and well pay you $600 every year forever. If you plan to live forever, what annual interest rate will you earn on your deposit?

3.60%

6.40%

3.20%

4.00%

Oops! When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $22,500. This revision, which will the interest rate earned on your deposited funds, will adjust your earned interest rate to .