Question

In: Finance

1. A local bank is running the following advertisement in the​ newspaper: "For just $ 4,000...

1. A local bank is running the following advertisement in the​ newspaper: "For just $ 4,000 we will pay you $ 240forever!" The fine print in the ad says that for a $ 4,000 deposit, the bank will pay $ 240every 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)?

The interest rate the bank is advertising is.....?% (round to nearest integer.)

Solutions

Expert Solution

Perpetuity = Periodic Cash flow / Interest rate

4000 = 240 / Interest rate

Interest rate = 240 / 4000

Interest rate = 0.06

In percentage, 0,06 * 100

= 6%

Therefore, Interest rate = 6%

jeff jeffy answered 2 years ago
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