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Difference between effective annual and percentage rare

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Question - A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10%, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments? Using the example of a savings account, explain the difference between the effective annual rate and the annual percentage rate.

Reference no: EM132730349

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