Question

A local bank’s advertising reads: "Give us $50,000 today, and we’ll pay you $800 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit?1.92%1.60%2.56%2.24%

Answer 1

The correct response is Option b (1.60%).

Step-by-step explanation:

According to the question,

Initial investment,

= $50,000

Perpetual annual cash flows,

= $800

Now,

The interest rate will be:

=
`(Perpetual \ annul \ cash \ flows)/(Initial \ investment)`

On substituting the given values, we get

=
`(800)/(50,000)`

=
`0.016`

i.e.,

=
`1.60 \ percent`