Suppose that you are given the opportunity to purchase an investment for $5,000 that promises to pay $50 at the end of every period forever. What is the periodic interest per period—the return—associated with this investment?
Question 10.EX.8: Suppose that you are given the opportunity to purchase an in...
We know that the present value is PV = $5,000 and the periodic, perpetual payment is CF = $50. Inserting these values into the formula for the present value of a perpetuity,
\$ 5,000=\frac{\$ 50}{i}
Solving for i, CF = $50, i = 0.01 or 1%. Therefore, an investment of $5,000 that generates $50 per period provides 1% compounded interest per period.
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