A 14-year annuity pays $2,600 per month, and payments are made at the end of each month. The interest rate is 10 percent compounded monthly for the first six years, and 8 percent compounded monthly thereafter. |
Required: |
What is the present value of the annuity? |
Annuity monthly payment = $2,600
Interest Rate for First 6 years = 10%
Divide this annuity in to 2 parts,
Interest Rate for First 6 years = 10%
After 6 years,
Time to maturity = 96 months
Monthly Payment = $2,600
Interest Rate = 8%
Using TVM calculation,
PV = [FV = 0, T = 96, I = 8%, PMT = 2600]
PV = $183,919
For the first 6 years,
Time to maturity = 72 months,
Monthly Payment = $2,600
Value at the end of 6 years = $183,919
Interest Rate = 10%
Using TVM calculation,
PV = [FV = 183919, T = 72, I = 10%, PMT = 2600]
PV = $241,532.68
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