Today you paid 360000 for an investment that provides 13200

Today you paid $360,000 for an investment that provides $13,200 a year forever (that is, in perpetuity). What rate of return are you earning on this investment? Assume the first payment is in one year.

3.42 percent

3.96 percent

3.54 percent

2.04 percent

3.67 percent

Solution

Total Investment made today = $360,000

Amount Reeived from the investment = $13,200

We know that,

PV of a perpetuity investment = Amount Received / Interest

Or, Interest = Amount Received / PV of Perpetuity Investment.

Let the Interest be X.

Hence,

Interest = $360,000 / $13,200

Interest = 0.0367 i.e. 3.67%