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The present value of infinite income stream

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1. If you are offered to buy a growing annual perpetuity that will pay you $150 a year from now and that will grow at 7% every year after that, whose rate of interest is 10.5%, should you accept to pay $5,000 for it?

A) I would pay less than what it is worth and therefore I would accept

B) No I should not accept, it is a bad deal

C) Yes, it is just fair

D) Yes it is a great deal

2. You still have to receive 10 yearly payments of interest $1,000 each from a friend to whom you loaned money a long time ago (you will receive the next payment from her exactly 1 year from now). Assuming the applicable rate of interest is 5%, at what price could you sell these payments today assuming someone was interested in buying it?

3. A perpetuity is an annuity that lasts forever. True or False?

4. A mortgage payment can be considered to be a constant perpetuity. True or False?

5. The present value of an infinite income stream:

A) is infinity

B) cannot be calculated

C) cannot be calculated, but the future value can be computed similarly since it is an annuity

D) is a finite number

Reference no: EM133238898

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