Questions:

$1)$ You have decided to buy a perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of $5\%.$ If you initially put $$1,000$ into the bond, what is the payment every year? Make sure to include a timeline.

$2)$ You are the beneficiary of a trust fund that will start paying you cash flows in five years. The cash flows will be $$25,000$ per year, and there will be a total of $40$ yearly cash flows paid. If the interest rate is $4\%$ per year, what is the value needed in the trust fund now to fund these cash flows? Make sure to include a timeline.

Perpetuities and Annuities

Questions:

$1)$ You are $25$ years old and decide to start saving for your retirement. You plan to save $$5,000$ at the end of each year $($so the first deposit will be one year from now$),$ and will make the last deposit when you retire at age $65.$ Suppose you earn $8\%$ per year on your retirement savings. How much will you have saved for retirement?

$2)$ You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last $17$ years. You expect that the drug$$s profits will be $$2$ million in its first year and that this amount will grow at a rate of $5\%$ per year for the next $17$ years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is $10\%$ per year?