Tobi Owns a Perpetuity That Will Pay $1,500 a Year

question 71

Essay

Tobi owns a perpetuity that will pay $1,500 a year, starting one year from now. He offers to sell you all of the remaining payments after the next 25 payments have been paid. What price should you offer him for payments 26 onward if you desire a rate of return of 8 percent? What does your offer price illustrate about the value of perpetuities?

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Definitions:

Euro

The official currency of the eurozone, which is used by 19 of the 27 European Union countries.

Net Exports

The value of a country's total exports minus its total imports, measuring the net trade of goods and services with other economies.

Nominal Exchange Rate

The rate at which one country's currency can be traded for another country's currency.

Yuan

The currency unit of the People's Republic of China, often used to denote the basic monetary unit.