Question

A financial instrument promises to pay $1,000 per year forever. If the appropriate discount rate is...

A financial instrument promises to pay $1,000 per year forever. If the appropriate discount rate is 8%, what should be the price that you are willing to pay for this instrument?

Group of answer choices

$14,500

$12,500

$10,000

not enough information

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Homework Answers

Answer #1

Correct answer: $12,500

We can compute the price of perpetual annuity ( Present value ) with following equation:

where,

P = Price of perpetual payments

A = Periodic payment amount

r = Periodic interest rate (discount rate)

putting the values:

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