Suppose you just bought a 20-year annuity of $7,300 per year at the current interest rate of 10...

Question:

Suppose you just bought a 20-year annuity of $7,300 per year at the current interest rate of 10 percent per year. What is the value of your annuity today? What happens to the value of your investment if interest rates suddenly drop to 5 percent? What if interest rates suddenly rise to 15 percent?

Present Value of an Annuity:

To answer this question, use the present value of an annuity formula to calculate the value when interest rates are 10 percent, 5 percent, and 15 percent, using $7,300 as your payment and 20 years as the timeline.

Answer and Explanation:

Use the PV annuity formula:

{eq}PV = P \frac{1 - (1+r)^-n}{r} {/eq}

Where:

  • "P" = Annuity Payment
  • "r" = discount rate
  • "n&q...

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How to Calculate the Present Value of an Annuity

from Business 110: Business Math

Chapter 8 / Lesson 3
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