Question

the present value of a series of payments of 2000 at the end of every four quarter, forever, is equal to 5000. calculate the effective rate of interest per quarter

Answer 1

The effective rate of interest per quarter is 40%.

Explanation:

This can be calculated using the formula for calculating the Present Value of a Perpetuity as follows:

PV = A / r ........................................ (1)

Where;

PV = Present value of the series of payments = $5,000

A = Quarterly payment = $2,000

r = Quarterly effective rate of interest = ?

Substituting the values into equation (1) and solve for r, we have:

5,000 = 2000 / r

5,000 * r = 2,000

r = 2,000 / 5,000

r = 0.40, or 40%

Therefore, the effective rate of interest per quarter is 40%.