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Question - Consider a perpetuity that pays you $1,000,000 every 6 months. Assume that the interest rate is 5%. You want to estimate the change in the value of your perpetuity when the interest rate suddenly increases by 0.1% to 5.1%.
Required -
a) By how much the value of the perpetuity will change?
b) If you would have estimated the change in the value of the perpetuity using the first-order Taylor approximation, by how much would your answer differ from the actual change that you were supposed to find in part (a)?
c) If you would have estimated the change in the value of the perpetuity using the second-order Taylor approximation, by how much would your answer differ from the actual change that you were supposed to find in part (a)?
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