Asked by Alivia Thomas on Jun 17, 2024
Verified
What amount can be paid at the end of every month in perpetuity from an endowment of $350,000 which is earning 5.4% compounded monthly?
A) $1,575
B) $1,890
C) $2,100
D) $15,750
E) $18,900
Compounded Monthly
A method of calculating interest where the accumulated interest is added to the principal sum each month, leading to an increase in the amount of future interest earned.
Perpetuity
An annuity whose payments continue forever.
- Digest the concept of perpetuity and the mechanics of calculating payments for perpetuities.
- Familiarize with the outcomes of differing compounding frequencies (monthly, quarterly, semi-annually, and annually) on the future value and payments.
- Engage with financial mathematics to examine and address real-life financial problems regarding savings, borrowing, and investments.
Verified Answer
AT
Anthony Toh Han YangJun 21, 2024
Final Answer :
A
Explanation :
The monthly payment from an endowment can be calculated using the formula for perpetuity: Payment = Principal × (Monthly Interest Rate). The monthly interest rate is 5.4% per annum, or 0.054/12 per month. Therefore, the payment is $350,000 × (0.054/12) = $1,575.
Learning Objectives
- Digest the concept of perpetuity and the mechanics of calculating payments for perpetuities.
- Familiarize with the outcomes of differing compounding frequencies (monthly, quarterly, semi-annually, and annually) on the future value and payments.
- Engage with financial mathematics to examine and address real-life financial problems regarding savings, borrowing, and investments.
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