Question

You own two investments, A and B, that have a combined total value of 55,503 dollars. Investment A is expected to make its next payment in 1 month. A’s next payment is expected to be 282 dollars and subsequent payments are expected to grow by 0.47 percent per month forever. The expected return for investment A is 1.05 percent per month. Investment B is expected to pay 181 dollars each quarter forever and the next payment is expected in 3 months. What is the quarterly expected return for investment B? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Investment in A + investment in B = $55,503

Investment in A	Investment in B
Payment in period 1: $282	Payment in period 1: $181
Periodicity: monthly	Periodicity: quarterly
Payment growth rate: 0.47%	Payment growth rate: 0%
Expected return on investment: 1.05%	Expected return on investment: ?

Investment in A = = $48,849

So, investment in B = $55,503 - $48,849 = $6,654

Investment in B = = $6654

r = 0.0272 = 2.72%