Question

A local bank’s advertising reads: "Give us $50,000 today, and we’ll pay you $800 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit?1.92%1.60%2.56%2.24%

Answer 1

Answer:

The correct response is Option b (1.60%).

Explanation:

According to the question,

Initial investment,

= $50,000

Perpetual annual cash flows,

= $800

Now,

The interest rate will be:

= $\frac{Perpetual \ annul \ cash \ flows}{Initial \ investment}$

On substituting the given values, we get

= $\frac{800}{50,000}$

= $0.016$

i.e.,

= $1.60 \ percent$