IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Present value and accumulated value of cashflow streams
An annuity pays Rs 2,000 at the end of each year in perpetuity. At what effective annual interest rate is its present value Rs 25,000?
The rate is 8%. A level perpetuity paid at year-end has present value equal to the payment divided by the effective rate, so i = 2,000/25,000 = 0.08. Checking, 2,000/0.08 returns Rs 25,000.
- A6%
- B7%
- C8%Correct
- D9%
- 10%
Explanation
Perpetuity PV = payment / i, so i = 2,000 / 25,000 = 0.08, or 8%. Check: 2,000/0.08 = 25,000. A rate of 10% would give a value of only 20,000.
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