Which of the following is true about perpetuities?
A)If two perpetuities have the same present value and the same interest rate, they must have the same cash flows.
B)All else equal, the value of a perpetuity is higher when the periodic cash flow is higher.
C)All else equal, the value of a perpetuity is higher when the interest rate is lower.
D)All of the above are true statements.

Question

Quizplus · Accepted Answer

A perpetuity is a type of annuity that pays periodic payments indefinitely. The value of a perpetuity is calculated as the periodic cash flow divided by the interest rate. Therefore, if two perpetuities have the same present value and the same interest rate, they must have the same cash flows to have the same value, making statement A true. Statement B is true because the value of a perpetuity increases as the periodic cash flow increases, given the formula for calculating the value of a perpetuity. Statement C is also true because the value of a perpetuity is inversely related to the interest rate; as the interest rate decreases, the value of the perpetuity increases. Therefore, all of the statements A, B, and C are true, making D the correct answer.

Which of the Following Is True About Perpetuities