A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or yo beneficiaries) $100 at the end of each year forever. a. Calculate the present value of your payments to the bank if the interest rate is 8.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value b. What is the present value of a $100 perpetuity deferred for 10 years if the interest rate is 8.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value c. Is this a good deal? No Yes

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.