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  • HW 3 Copy Rachel

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    This document contains worked examples of calculating present value, future value, and interest rates for annuities. [1] It calculates the present and future values of a $13,500 annuity paid annually over 5 years at 6.8% interest, finding higher values for an "annuity due" where payment is received at the start vs end of periods. [2] It finds the value $36,633.51 for a perpetual $6,400 cash flow starting in 15 years, viewed 7 years in the future at a 5.3% interest rate. [3] It poses calculating the maximum monthly interest rate that can be afforded on a $115,000 loan paid back

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    This document contains worked examples of calculating present value, future value, and interest rates for annuities. [1] It calculates the present and future values of a $13,500 annuity paid annually over 5 years at 6.8% interest, finding higher values for an "annuity due" where payment is received at the start vs end of periods. [2] It finds the value $36,633.51 for a perpetual $6,400 cash flow starting in 15 years, viewed 7 years in the future at a 5.3% interest rate. [3] It poses calculating the maximum monthly interest rate that can be afforded on a $115,000 loan paid back

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    5 views2 pages

    HW 3 Copy Rachel

    Uploaded by

    rachelsita.reich
    This document contains worked examples of calculating present value, future value, and interest rates for annuities. [1] It calculates the present and future values of a $13,500 annuity paid annually over 5 years at 6.8% interest, finding higher values for an "annuity due" where payment is received at the start vs end of periods. [2] It finds the value $36,633.51 for a perpetual $6,400 cash flow starting in 15 years, viewed 7 years in the future at a 5.3% interest rate. [3] It poses calculating the maximum monthly interest rate that can be afforded on a $115,000 loan paid back

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 2

    HW 3

    1. Assume that you will get $13,500 a year for the next five years. Interest rate is 6.8% per
    annum.

    a. If you receive the amount at the end of each year, what is the present value of the
    annuity?

    The formula is the one used for ordinary annuity.

    [ ]
    1
    1−
    ( 1+r )t
    PV =C
    r

    This way.

    [ ]
    1
    1−
    PV =13,500
    ( 1.068 )5
    0.068
    =13,500
    [
    0.28312869719842
    0.068 ]
    =13,500 [ 4.122248084115327 ] =55,650.35

    If you receive the amount at the start of each year, what is the present value of the
    annuity?

    In this part we use the formula for the annuity due, which is similar to the ordinary
    annuity instead you multiply the result to (1+r)

    PV =55,650.35∗( 1.068 )=59 , 434.57

    b. Assume that you invest the annuity every time you receive for the next five years. You
    receive the money in the way specified in question 1 a. What is the future value of the
    annuity? What is the future value of the annuity if the annuity is paid in the way specified
    in question 1 b?

    To get the future value of the way specified in question 1a is necessary the formula of
    ordinary annuity.

    FV =C [ ( 1+r )t −1
    r ]
    Then.

    FV =13,500 [
    ( 1.068 )5−1
    0.068 ]
    =13,500
    [
    0.389492680813568
    0.068 ]
    =13,500 [ 5.727833541376 ] =77,325.75

    And for the way specified in question 1b, the formula is similar to ordinary annuity, but
    we multiply to (1+r).

    FV =77325.75∗( 1.068 )=82,583.90


    c. From a, b above, whose present value is bigger? From a, b above, whose future value is
    bigger? Is it always the case?

    The present value and future value of annuity due are bigger than the ordinary annuity.
    This because we start the year with the cash flow instead of the ordinary annuity which is
    added at the end of the year.

    2. If the interest rate is 5.3% per annum, and the cash flow of $6,400 will occur from 15
    years from now(t=15) forever, what is the value of the cash flow 7 years from now(t=7)?

    36,633.51

    3. You are trying to borrow $115,000 from the bank. You will be able to pay back $2,250
    every month. If the interest compounds monthly, what is the maximum level of interest
    you can afford for the 60-month-borrowing?

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