At what rate of interest will the present value of a perpetuity of Rs. 1000 payable at the end of every six months be Rs. 20000?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 10%
Given:
Perpetuity payment: R = 1000 (every six months)
Present value: PV = 20000
Rate per period: r
Present value of perpetuity formula: PV = $\frac{R}{r}$
Substitute the values:
20000 = $\frac{1000}{r}$
r = $\frac{1000}{20000} = 0.05$
Since the payment is every six months, the semi-annual interest rate is 5%
Annual interest rate = 2 × 5% = 10%