What amount, invested today at 6% compounded monthly, will support perpetual monthly payments of $500? The first payment will be made one month from now.

Question

Quizplus · Accepted Answer

To find the principal amount that can support perpetual monthly payments of $500 at an interest rate of 6% compounded monthly, we use the formula for the present value of a perpetuity: $PV = \frac{PMT}{r}$, where PMT is the monthly payment and r is the monthly interest rate. The annual interest rate is 6%, so the monthly interest rate is $0.06/12 = 0.005$. Plugging in the values, we get $PV = \frac{500}{0.005} = 100,000$. Therefore, an investment of $100,000 is needed.

What Amount, Invested Today at 6% Compounded Monthly, Will Support