Present Value of a Perpetuity A perpetuity pays $50 per year and interest rates are 9 percent.How much would its value change if interest rates decreased to 6 percent?

Question

Quizplus · Accepted Answer

The present value of a perpetuity is calculated as the annual payment divided by the interest rate. Using the current interest rate of 9%, the value of the perpetuity is:

$50 / 0.09 = $555.56

If interest rates decrease to 6%, the value of the perpetuity would be:

$50 / 0.06 = $833.33

The difference in value is:

$833.33 - $555.56 = $277.78

Therefore, the value of the perpetuity would increase by $277.78, making choice C the correct answer.

Present Value of a Perpetuity a Perpetuity Pays $50 Per