Question

What is the price of an annuity with a 10-year maturity and annual payment of $5,000 at a yield of 2.5% and a risk premuim of 2.5% show work

Answer 1

- Annual Payment for 10 years in annuity = $5000

Annuity yield = 2.5%

Risk Premium = 2.5%

Annuity Interest rate = Yield + Risk Premium = 2.5% + 2.5%

Annuity Interest rate = 5%

Calculating the Present Value of annuity:-

Where, C= Periodic Payments = $5000

r = Periodic Interest rate = 5%

n= no of periods = 10 years

Present Value = $38,608.67

So, the price of an annuity is $38,608.67

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