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dem82 [27]
3 years ago
15

A local bank will pay you $275 at the end of each year for your lifetime if you deposit $4,400 in the bank today. If you plan to

live forever, what interest rate is the bank paying? (Enter your answers as a percent rounded to 2 decimal places.)
Business
1 answer:
Dima020 [189]3 years ago
5 0

Answer:

Interest rate = 6..3%

Explanation:

<em>An investment that pays a fixed amount for life is called a perpetuity. The worth of a perpetuity today is the present value of the future cash flow. Using the present value of the perpetuity formula, we can work out the interest rate as follows:</em>

PV = A ×   1/r

<em>Where PV = present value, r- Interest rate , A- annual cash flow</em>

4,400 = 275×    1/r

cross multiply

4,400 ×  r= 275

divided both sides by 4,400

r = 275/4400

r= 0.0625  × 100

r= 6.25%

r= 6.3%

Interest rate = 6..3%

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