The present value of a perpetual loan, for which only outstanding interest is paid (no principal), is equal to:
A) the principal.
B) the sum of future interest payments, which is infinity.
C) zero.
D) It depends on the rate of interest, which is also the rate of discount.

Question

Quizplus · Accepted Answer

The present value of a perpetual loan, where only interest is paid, is equal to the principal because the interest payments are perpetual and equal to the interest rate times the principal, making the present value of these payments equal to the principal.

The Present Value of a Perpetual Loan, for Which Only