John spends $4,000 on a perpetuity that pays $150 each year.The yield to maturity of this perpetuity is

Question

Quizplus · Accepted Answer

The perpetuity formula is:
PV = C / r

Where,
PV = Present Value
C = Cash flow per period
r = discount rate

Substituting the given values in the formula, we get:

$4,000 = $150 / r

Solving for r, we get:

r = $150 / $4,000
r = 0.0375 or 3.75%

Therefore, the yield to maturity of this perpetuity is 3.75%, which is option B.

John Spends $4,000 on a Perpetuity That Pays $150 Each