Skip to content

CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

A trust wants to pay a scholarship of Rs 12,000 every year forever, with the first payment one year from now. The relevant interest rate is 8% p.a. What sum must be set aside today, and what is this type of annuity called?

The trust must set aside Rs 1,50,000, because an unending annual payment is a perpetuity whose present value is the payment divided by the interest rate: 12,000 divided by 0.08. It is not a deferred annuity or annuity due.

  1. ARs 1,50,000; perpetuityCorrect
  2. BRs 96,000; annuity due
  3. CRs 1,62,000; perpetuity due
  4. DRs 1,50,000; deferred annuity

Explanation

A payment stream that continues indefinitely is a perpetuity. PV = payment / rate = 12,000 / 0.08 = Rs 1,50,000. Check: 1,50,000 x 8% = 12,000. Rs 1,62,000 adds one payment up front, which applies only if the first payment were immediate.

Did you get it right without looking?

One question tells you little. A timed set on Calculation of Interest and Annuities shows your real accuracy, how long you take and where you lose marks.

Practise Calculation of Interest and AnnuitiesFree diagnostic mock

More Calculation of Interest and Annuities questions