BU672 – TUTORIAL QUESTIONS FOR TOPIC 7: PERPETUATIES

1. Determine the discounted value of an ordinary simple perpetuity paying $50 a

month if:

1. 𝑖12 = 6% p.a.
2. 𝑖12 = 7.2% p.a.

2. Determine the discounted value of an ordinary simple perpetuity paying $400 a

year if interest is:

1. 𝑖1 = 8% p.a.
2. 𝑖1 = 12.48% p.a.

3. How much money is needed to establish a scholarship fund paying $1500 annually
if the fund will earn interest at 𝑖1 = 6% p.a. and the 1st payment will be made:

1. At the end of the 1st year

2. 5 years from now
3. Immediately

4. On 1 September 2012, a businessman gives a university a fund of $50,000, which

is invested at 𝑖2 = 6% p.a. If semi-annual scholarships are awarded for 20 years
from this grant, what is the size of each scholarship if the first one is awarded
on:

1. 1 September 2012?
2. 1 September 2014?

5. A company has stock that pays a semi-annual dividend of $4. If the stock sells
for $64, what yield 𝑖2 did the investor desire? What is the equivalent rate 𝑖1 ?

6. A former student gives a cash donation of $100,000 to her former university.

The donation is invested in an endowment fund at 𝑖1 = 7% p.a. An annual
scholarship is to be paid from this fund of $R for the first 10 years, followed by
$1.5R thereafter. What is R?