Question

A donor established a new scholarship that will pay $5,000 every 6 months to a deserving Kelley student. The scholarship will be awarded for the first time in June of 2021 (12 months from today). The donor decides that the scholarship should be provided in perpetuity. The IU Foundation manages investments like this for the Business School. The Foundation anticipates earning an APR of 6% per year on the invested funds, compounded monthly. What is the amount of the donation that must be given to the IU Foundation today to fully endow this Kelley scholarship?

Answer 1

1. Effective Annual rate = [(1 + Interest per month)^12] - 1

Effective Annual rate = [(1 + 6%/12)^12] - 1

Effective Annual rate = [1.005^12] - 1

Effective Annual rate = 1.0617 - 1

Effective Annual rate = 6.17%

2. Amount to be donated today = [Scholarship per Six Months / (Interest Per 6 months)] / (1 + Interest per 6 months)

Amount to be donated today = [5000 / (3.083%%)] / (1 + 3.083%)

Amount to be donated today = $162132.86 / 1.03083

Amount to be donated today = $157282.44