Business, 14.02.2020 00:10 yasmin7813

Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. a. In a perpetuity, returns-in the form of a series of identical cash flows-are earned. b. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate. c. The principal amount of a perpetuity is repaid as a lump-sum amount. d. A perpetuity continues for a fixed time period.

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Answer from: richaeviney

The first two are true characteristics of a perpetuity:

a. In a perpetuity, returns-in the form of a series of identical cash flows-are earned.

b. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate.

Explanation:

As stated, perpetuities are the same that annuities with an extended, or unlimited, life.

Then, pertuity means that there is an amount that is received periodically for ever.

In similar words, a perpetuity is an asset that produces the same amount of money every year, for all the coming years, for "all eternity". The income of money never ends.

The best things of perpetuities is that there is an easy formula to calculate them. You will se below.

Let's see the choices:

a. In a perpetuity, returns-in the form of a series of identical cash flows-are earned.

This is completely correct: the returns in the form of identical cash flows are the equal amounts of money that are received every year.

b. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate.

That is correct and is one of the reasons to compare some assets with a perptuity: the calculation is very easy. The formula is:

$PV=\frac{C}{r}$

Where: PV is the present value of the perpetuity, C is the amount of the payment (cash flow), which is constant, and r is the interest rate.

c. The principal amount of a perpetuity is repaid as a lump-sum amount.d. A perpetuity continues for a fixed time period.

This is FALSE. The principal amount of a perpetuity is not repaid, only the periodic payments are paid, for ever, and the principal is never repaid.

d. A perpetuity continues for a fixed time period.

This is also FALSE, because, as it has been clearly stated, the perpetuity is based on the continuity for ever.

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