Use the Table for the Question(s) Below

question 88

Essay

Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:

-What is the implied assumption about interest rates when the equation to calculate the present value (PV) of perpetuity is used?

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Definitions:

Real Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing or the true return on investment.

Nominal Rate

The interest rate before adjustments for inflation, as opposed to the real rate, which is adjusted for inflation.

Rate of Inflation

The percent change in the price level of goods and services in an economy over a period of time, usually measured annually.

Interest

Interest is the charge for borrowing money typically expressed as an annual percentage rate, or the income earned from lending money.