Question

1. What is the size of the scholarship that can be paid in perpetuity at the end of every three months from a fund $15,200. Interest is interest is 6.72% compounded annually.

*Please use financial calculator method and show the values being entered for PY, CY, I, N, PMT, FV, PV along with your final answer*

Answer 1

The problem can be solved using perpetuity.

Fund Value = Cash Flow / Interest Rate {We are not considering growth as there is none}

15,200 = Cash Flow / 6.72%

Cash Flow = 1,021.44

So we need a fund od $15,200 to receive cashflow of $1,021.44 each year at 6.72% yearly for perpetuity.

Here the payment will be made quarterly. So,

Quarterly Payment = Annual Payment / 4

= 1,021.44 / 4

= $255.36

So a scholarship of $255.36 can be received quarterly with a fund size of $15,200