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

Question

dem82 [27]

4 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] · Answer 1 · 2022-01-30T07:33:28+03:00

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%