Question

A local bank is running the following advertisement in the​ newspaper: "For just $ 2 comma 000 we will pay you $ 200 ​forever!" The fine print in the ad says that for a $ 2 comma 000 ​deposit, the bank will pay $ 200 every year in​ perpetuity, starting one year after the deposit is made. What interest rate is the bank advertising​ (what is the rate of return of this​ investment)?

Answer 1

10%

Step-by-step explanation:

Since the payment is a perpetuity, it means that the local bank is advertising a an interest rate of 10%.

This is derived by simply using the formula

PV = 2000

r

where the PV is 200,

r is unknown.

we have, 200 = 2000

r

we have 200r = 2000

solving for r, we have,

r = 2000 /200

= 10%

The $200 return rate is 10% of the initial deposit.

Cheers.