Question

A perpetuity pays 700 dollars annually. At the time of the second payment, the present value of the entire perpetuity (including the first payment) is 6900 dollars. What is the smallest possible effective rate of interest?

Answer 1

o find the smallest possible effective rate of interest, we can use the formula for the present value of a perpetuity:

Present Value = Cash Flow / Interest Rate

In this case, the present value is given as $6900 and the cash flow is $700 annually. Let's denote the interest rate as "r". The equation becomes:

6900 = 700 / r

To find the smallest possible effective rate of interest, we need to solve for "r". We can rearrange the equation as:

r = 700 / 6900

Simplifying this expression gives us:

r ≈ 0.10145

Therefore, the smallest possible effective rate of interest is approximately 10.1

Step-by-step explanation: