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

Sunil Traders is offered a perpetuity by a financial institution paying Rs 6,000 at the end of every year forever. If the discount rate is 8% p.a., what is the present value of this perpetuity, and what happens if the payments begin immediately (perpetuity due)?

The ordinary perpetuity is worth Rs 75,000, being Rs 6,000 divided by 8%. A perpetuity due, with the first payment received immediately, is worth Rs 81,000, since the first Rs 6,000 is added without discounting.

  1. ARs 75,000 for ordinary; Rs 81,000 for perpetuity dueCorrect
  2. BRs 75,000 for ordinary; Rs 69,000 for perpetuity due
  3. CRs 48,000 for ordinary; Rs 54,000 for perpetuity due
  4. DRs 81,000 for ordinary; Rs 75,000 for perpetuity due

Explanation

Ordinary perpetuity PV = 6,000/0.08 = Rs 75,000. A perpetuity due is received one period earlier, so PV = 75,000 + 6,000 = Rs 81,000 (or 75,000 x 1.08). Option with 69,000 subtracts the first payment instead of adding.

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