13. A local bank is running the following advertisement in the newspaper: "For just $3,000 we...
13. A local bank is running the following advertisement in the newspaper: "For just $3,000 we will pay you $180 forever!" The fine print in the ad says that for a $3,000 deposit, the bank will pay $180 every year in perpetuity, starting one year after the deposit is made. What interest rate is the bank advertising (what is the rate of return of this investment)?
Homework Answers
rate positively ..
| Interest rate = Annual amount/Initial payment | |||||
| 180/3000 | |||||
| 6.00% | |||||
| Therefore answer = | 6.00% | ||||
NPV = 0 = -3000 + 180/(1+r) + 180/(1+r)2 + 180/(1+r)3 + ...
= -3000 + 180/r
r = 0.06 => IRR = 6%
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