Question

David decided to invest an amount of money in a bank that pays 20.00% nominal interest,...

David decided to invest an amount of money in a bank that pays 20.00% nominal interest, compounded monthly, to provide him with an annuity of $10,800 (per year) for 6 years, starting 12 years from now. If the interest rate remains constant over this entire period. What amount should he invest?

Homework Answers

Answer #1

Annuity = $10,800

Time = 6 years after 12 years from now

Interest rate = 20%

Let the amount that should be invested be $x

Present Value = Annuity*PVAF(r%,n)

x = 10,800*PVAF(20%,6)*PVF(20%,12)

(PVF is used to discount the value to today otherwise we will get the present value at 12th year from now)

x = $10,800*[(1-1.2-6)/0.2]*1.2-12

x = 10,800*3.3255*0.1121

x = $4,028

Amount to be invested now = $4,028

(For any query post your question in comment section

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