5. Suppose you get for free one of following two securities: (a) an annuity that pays$10,000 at the end of each of the next 6 years; or (b) a perpetuity that pays $10,000forever, but it does not begin until 10 years from now (the first cash payment from thissecurity is 11 years from today).Which security would you choose if the annual interest rate is 5%?Does your answer change if the interest rate is 10%? Explain why or why not.
5. Suppose you get for free one of following two securities: (a) an annuity that pays$10,000 at the end of each of the next 6 years; or (b) a perpetuity that pays $10,000forever, but it does not begin until 10 years from now (the first cash payment from thissecurity is 11 years from today).Which security would you choose if the annual interest rate is 5%?Does your answer change if the interest rate is 10%? Explain why or why not.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
5. Suppose you get for free one of following two securities: (a) an
$10,000 at the end of each of the next 6 years; or (b) a perpetuity that pays $10,000
forever, but it does not begin until 10 years from now (the first cash payment from this
security is 11 years from today).
Which security would you choose if the annual interest rate is 5%?
Does your answer change if the interest rate is 10%? Explain why or why not.
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