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  1. MHB Master
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    #1
    Hey!!

    I want to determine the present value of a perpetual annuity, which will incur an interest payment of 1 at the end of each year.

    A calculative interest rate $r$ is assumed.

    We are at the time $t = 0$, the first payout is in $t = 1$.


    Could you explain to me what an interest payment exactly and what a calculative interest rate is?

  2. MHB Master
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    #2 Thread Author
    Let $K$ be the initial capital.
    Since the calculative interest rate is $r$ we have that after the first year the present value of a perpetual annuity will be $K+Kr$.
    We want that the interest payment at the end of each year is $1$, so the amount of money that we add to the initial capital at the end of each year is $1$ euro, i.e., $Kr=1$.

    Is this correct?

    Or have I misunderstood the meanings?

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