You deposit $11,000 annually into a life insurance fund for the next 11 years, after which time...

Question:

You deposit $11,000 annually into a life insurance fund for the next 11 years, after which time you plan to retire.

a. If the deposits are made at the beginning of the year and earn an interest rate of 6 percent, what will be the amount in the retirement fund at the end of year 11?

b. Instead of a lump sum, you wish to receive annuities for the next 22 years (years 12 through 33). What is the constant annual payment you expect to receive at the beginning of each year if you assume an interest rate of 6 percent during the distribution period?

Annuity Payments:

The payments of an annuity are assumed to be received at the end of each period. Thus, the first payment is expected one period from now. If these payments are received at the beginning of each period, the annuity formula would need to be adjusted to reflect that.

Answer and Explanation: 1

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a.

Let,

  • FV = present value
  • PMT = periodic payment = $11,000
  • n = number of payments = 11
  • r = interest rate = 6%

The savings are an example of an...

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How to Find the Value of an Annuity

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Chapter 21 / Lesson 15
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An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.


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