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Ms. Karin Fraulet has found out today that she has won a lottery prize in the form of a deferred perpetuity, providing annual end of year payments of $10,500. The first payment for the perpetuity will be received by Karin at the end of year 5. Given the details of the prize, it has been assessed that the relevant opportunity cost of funds for Karin is 15% p.a., compounded on a quarterly basis.
Required:
Problem a) Briefly explain what is it about this series of cash flows, when combined with the rest of the given information in this question, that requires the calculation of an effective annual interest rate (EAR) if seeking to solve for the unknown present value of this perpetuity? Note - No calculations are required for this part of the question.
Problem b) What is the relevant EAR in this part of the question?
Problem c) What is the current value (today) of Karin's right to receive the deferred perpetuity?
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