Question

Annuity due pays $400 every 6 months for 10 years starting today. Assume you will purchase with returns 6% annually, what is the most you'd be willing to pay?

Answer 1

Information provided:

Annuity= $400

Time= 10 years*2= 20 semiannual periods

Interest rate= 6%/2= 3% per semi-annual period

Annuity due refers to annuity that occurs at the beginning of a period.

The question is solved by calculating the present value of annuity due with the help of a financial calculator.

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

The below has to be entered in a financial calculator:

PMT= 400

N= 20

I/Y= 3

Press the CPT key and PV to compute the present value.

The value obtained is 6,129.52.

Therefore, I will be willing to pay $6,129.52.

In case of any query, kindly comment on the solution.