Question

Compute the present value of an ordinary annuity that pays $100 quarterly for 3 years, given the investment is expected to earn 12% compounded monthly.

Answer 1

Monthly rate =12%/12 =1%
Quartely effectiverate = (1+0.01)^3 -1
=3.0301%
Present Value Of An Annuity
= C*[1-(1+i)^-n]/i]
Where,
C= Cash Flow per period
i = interest rate per period =3.0301%
n=number of period =4*3 =12
= $100[ 1-(1+0.030301)^-12 /0.030301]
= $100[ 1-(1.030301)^-12 /0.030301]
= $100[ (0.3011) ] /0.030301
= $993.61