What is the rate of return (expressed as a percentage) if you pay \$950 for a perpetuity that pays \$85 per year?

• A. 9.50\%
• B. 11.21\%
• C. 8.95\%
• D. 7.50\%

Answer: (C)

Verified step by step guidance

1. Understand the concept of a perpetuity: A perpetuity is a financial instrument that provides a fixed payment indefinitely. The formula to calculate the rate of return (or yield) for a perpetuity is: \( r = \frac{C}{P} \), where \( C \) is the annual payment (cash flow) and \( P \) is the price paid for the perpetuity.
2. Identify the given values in the problem: The annual payment \( C \) is \( 85 \) dollars, and the price paid for the perpetuity \( P \) is \( 950 \) dollars.
3. Substitute the given values into the formula: \( r = \frac{85}{950} \).
4. Convert the result into a percentage: Multiply the result of \( \frac{85}{950} \) by 100 to express the rate of return as a percentage.
5. Compare the calculated percentage to the provided options (9.50\%, 11.21\%, 8.95\%, 7.50\%) to determine the correct answer.