You deposit $12,000 annually into a life insurance fund for the next 10 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 10? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
b. Instead of a lump sum, you wish to receive annuities for the next 20 years (years 11 through 30). 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? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
c. Repeat parts (a) and (b) above assuming earning rates of 5 percent and 7 percent during the deposit period and earning rates of 5 percent and 7 percent during the distribution period. (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))
An annuity is a series of equal payments that are made regularly. There are two types of annuities: ordinary annuity and annuity due. Ordinary annuity is a stream of constant payments that are due at the end of each period. On the other hand, annuity due is an annuity whose payment is made at the beginning of the period.
Answer and Explanation:
a. We need to calculate the future value of an annuity due (an annuity with which the payments are made at the beginning of each period). The formula...
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from Finance 102: Personal FinanceChapter 9 / Lesson 5