A perpetuity pays $550 at the end of every month.The PV of the perpetuity is $36,000.What is the effective interest rate (EIR)on the perpetuity?
A) 19.95%
B) 18.33%
C) 9.17%
D) 13.42%
E) 15.15%

Question

Quizplus · Accepted Answer

Step 1 - Solve for the nominal annual rate (APR).
PV = 11ea7fdb_fc19_8e18_a768_f12121242db8_TB2902_11 36,000 = 11ea7fdb_fc19_b529_a768_a5e1e2322c8b_TB2902_11 i = 11ea7fdb_fc19_b52a_a768_490c33ffadcf_TB2902_11 = 1.5277%
1.5277% × 12 = 18.33%
Step 2 - Use the nominal rate to solve for the effective rate.
Effective interest rate = 11ea7fdb_fc19_b52b_a768_59d4bd05214e_TB2902_11 - 1
Effective interest rate = 11ea7fdb_fc19_b52c_a768_eb7690e921cf_TB2902_11 - 1 = 19.95%

A Perpetuity Pays $550 at the End of Every Month