A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?

Question

Melvin Rogers

Business

28 December, 14:58

A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?

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Answers (1)

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Cason Hammond · Answer 1

The grandchild will receive at least $140,000 per year.

Explanation:

Because the principal of the trust is not distributed as stipulated in the trust agreement, the only income source from the trust fund is its interest income earned on trust principal.

The interest rate is given to be at least 7% per year, so we have the minimum income the grandchild receives each year will be calculated as:

Principal of trust fund x Minimum interest rate earned from trust = 2,000,000 x 7% = $140,000.

So, the answer is $140,000.