CA Foundation · Quantitative Aptitude · Mathematics of Finance
A charitable society wants to fund an annual prize of ₹12,000 to be paid at the end of every year forever, starting one year from now. If the rate of interest is 6% per annum, what sum must be set aside today?
The required sum is ₹2,00,000. The present value of an ordinary perpetuity equals the annual payment divided by the interest rate, so 12,000 divided by 0.06 gives 2,00,000. The interest earned each year on this corpus exactly equals the prize, leaving the principal intact.
- A₹1,20,000
- B₹2,00,000Correct
- C₹72,000
- D₹2,12,000
Explanation
Present value of a perpetuity = payment / rate = 12,000 / 0.06 = ₹2,00,000. Check: 6% of 2,00,000 = 12,000. Using 10% by mistake gives ₹1,20,000. Multiplying 12,000 by 6 gives ₹72,000, which is wrong.
Did you get it right without looking?
One question tells you little. A timed set on Mathematics of Finance shows your real accuracy, how long you take and where you lose marks.
More Mathematics of Finance questions
- A perpetuity of ₹6,000 per year, the first payment coming at the end of year 4 (payments thereafter at the end of each year forever), is to …
- Deepa deposits ₹6,000 at the end of each year for 3 years in an account paying 10% per annum compounded annually. She leaves the accumulated…
- Vikram deposits ₹5,000 at the end of every half-year for 2 years in a scheme paying 20% per annum compounded half-yearly. What will be the a…
- Ms. Kavita divides ₹11,000 into two parts. She lends the first part at 5% per annum simple interest for 2 years and the second part at 4% pe…
- A perpetuity pays ₹6,000 at the end of each year forever, with the first payment due at the end of year 4 (that is, three full years from no…
- Verma Ltd. sets up a sinking fund to repay a debenture of ₹3,31,000 after 3 years. It will deposit an equal amount at the end of each year, …