Question

Need help with getting the correct answer with explaining,

please.
A perpetuity promises to make payments of \( \$ 565 \) at the end of each year with the first occurring one year from today. If the perpetuity is selling for \( \$ 14,000 \), what rate of return is be

Answer 1

To determine the rate of return for a perpetuity, use the formula r = PMT / PV where PMT is the annual payment and PV is the current selling price. For a $565 annual payment perpetuity selling for $14,000, the rate of return is approximately 4.04%.

Step-by-step explanation:

The question revolves around the concept of perpetuities and rate of return. Perpetuities are financial instruments that pay a fixed amount each year indefinitely. The formula for the present value (PV) of a perpetuity is PV = PMT / r, where PMT is the annual payment and r is the rate of return. In this case, you are given a perpetuity payment (PMT) of $565 and the perpetuity is selling for $14,000. To find the rate of return, rearrange the formula to r = PMT / PV. Plug in the values to get r = $565 / $14,000 = 0.0403571 or about 4.04%. Therefore, the annual rate of return is approximately 4.04%.