Videos: Perpetuities and Stocks
Perpetuities
A wealthy BCIT alumnus has decided to make an endowment to the School of Business to fund an annual scholarship for the best business math student. She will donate $15,000 and the funds will be invested at 6.6% effective.
(a) How much will the annual scholarship be if the first scholarship is in one year?
(b) If they decide to give out the first scholarship today, how much will the alumnus have to donate to keep the same scholarship from part (a).
(c) If she decides to keep her endowment at $15,000, how much will the annual scholarship be if the first scholarship is today?
The Winitall lottery offers you two choices for its grand prize: either a cash prize of $1,500,000; or $7,000 per month forever with the first payment today. Which choice should you select if interest is 6% monthly?
Stocks
You purchase some preferred shares that have a semi-annual dividend of $1.25. How much should you pay for the shares if the interest rate is 5% compounded semi-annually and the first dividend is in 6 months?
You purchase the shares above for $50 and the interest rate rises to j2=8%.
- How much would you make or lose? (assume the first dividend is still in 6 months)
- How much money would you make or lose if the interest rate was 6% effective? (assume the first dividend is still in six months)
