The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $220 a year forever, starting two years from today?

A) $4,000
B) $4,400
C) $2,000
D) $2,200
E) $5,000

Question

Quaneesha Addison · Accepted Answer

Final Answer : A, Explanation :  The present value of the investment is the sum of the present values of the two cash flows: the $220 payment in two years and the perpetuity of $220 payments starting in three years. The present value of the first payment is $220/(1.1)^2 = $176.47. The present value of the perpetuity is $220/0.05 = $4,400. The total present value is $176.47 + $4,400 = $4,576.47.

The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $220 a year forever, starting two years from today?

A) $4,000
B) $4,400
C) $2,000
D) $2,200
E) $5,000

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The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $220 a year forever, starting two years from today?A) $4,000B) $4,400C) $2,000D) $2,200E) $5,000

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Learning Objectives

Learning Objectives

Related questions

The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $220 a year forever, starting two years from today?

A) $4,000
B) $4,400
C) $2,000
D) $2,200
E) $5,000