Suppose the borrowing rate rB=10% compounded annually. However, the lending rate (or equivalently, the interest rate on deposits) is only 8% compounded annually. Compute the difference between the upper and lower bounds on the price of an perpetuity that pays A=10,000\$ per year.

$25,000

Explanation:

From the question, we are told that the borrowing rate rB=10% compounded annually and the lending rate (or equivalently, the interest rate on deposits) is only 8% compounded annually.

The upper bounds on the price of an perpetuity that pays $10,000 per year will be:

= $10,000/10%

= $10,000/0.1

= $100,000

The lower bounds on the price of an perpetuity that pays $10,000 per year will be:

= $10,000/8%

= $10,000/0.08

= $125,000

The difference between the upper and lower bounds will now be:

= $125,000 - $100,000

= $25,000

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