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 $440 a year forever, starting two years from today?

A) $4,000
B) $8,800
C) $4,400
D) $8,000
E) $9,000

Question

Rylie Rundell · Accepted Answer

Final Answer : D, Explanation :  The investment pays $440 starting in year 2. The present value of a perpetuity starting in year 2 with a 5% interest rate is $440/0.05 = $8,800. Discount this back one year at 10%: $8,800 / 1.10 = $8,000.

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 $440 a year forever, starting two years from today?

A) $4,000
B) $8,800
C) $4,400
D) $8,000
E) $9,000

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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 $440 a year forever, starting two years from today?A) $4,000B) $8,800C) $4,400D) $8,000E) $9,000

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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 $440 a year forever, starting two years from today?

A) $4,000
B) $8,800
C) $4,400
D) $8,000
E) $9,000