In: Finance
(i). You are 20 years old. What is the fair price for a perpetuity that begins to pay you $2,000
annually from when you become 60 years old, assuming a 5% market interest rate? (the
payment starts at the end of 60 years.)
(ii). What is the fair price if the financial product is not a perpetuity but an annuity which
pays $2,000 per year during your ages from 60 to 100 years (again at a 5% interest rate)?
Q _ Why is the price differential between the perpetuity in (i) and the annuity in (ii) is not
that large?