The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?
A)$4,000
B)$8,800
C)$4,400
D)$8,000
E)$9,000

Question

Quizplus · Accepted Answer

The investment pays $440 starting in year 2. The present value of a perpetuity starting in year 2 with a 5% interest rate is $440/0.05 = $8,800. Discount this back one year at 10%: $8,800 / 1.10 = $8,000.

The Interest Rate Will Be 10% for One More Year