Answer to Question #252871 in Financial Math for Style blue

Question

Centuries ago, rich families in the province of friesland established a fund to further welfare and education.from this fund,only the interest revenue was allowed to be spent in order to keep principal amount unattached .assume the fund has amounted to R12 million and market interest rate is 6%annually .what could be the perpetuity (or present value of the fund ) endowed to the society?

Answer 1

Given information :

Amount of fund = 12 million 

Interest rate = 6%

Since the principal is kept to be untouched and only interest revenue can is allowed to spent, only the interest payment can be owed to the society.

In the given case, the present value to be owed to the society will be the current value of the fund and it can be proved as follows :

Calculations for above :

Answer :

The amount to be owed to the society will be the present value of all the interest rate payments that will be made in future. The present value of those payments is the present value of the fund which is 12 million ,hence it is the final amount to be owed.