1. You expect to receive an annuity of $1,000 per year for the next five years. The market rate of interest is 12%. Assuming that you do not spend any of the income at any other time, what is the future value of these payments at the end of five years? What is the value today?
2. Consider a perpetuity that pays $1,000 per year; the market rate of interest is 10%. What is the PV of the perpetuity? What is the PV of the perpetuity three years from now? What is the PV of the perpetuity 20 years from now? Under what circumstances does the value of the perpetuity change?