Question

Suppose you just bought an annuity with 9 annual payments of $15,400 at the current interest rate of 11 percent per year. a. What is the value of the investment at the current interest rate of 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What happens to the value of your investment if interest rates suddenly drop to 6 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What happens to the value of your investment if interest rates suddenly rise to 16 percent?

Answer 1

Instructions are listed below

Step-by-step explanation:

Giving the following information:

Suppose you just bought an annuity with 9 annual payments of $15,400 at the current interest rate of 11 percent per year.

First, we need to determine the final value with the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

Then, we can calculate the present value with the following formula:

PV= FV/(1+i)^n

A)i=11%

FV= {15400*[(1.11^9)-1]}/0.11

FV= $218,125.17

PV= 218,125.17/(1.11^9)= $85,270.53

B) i= 6%

FV= {15400*[(1.06^9)-1]}/0.06

FV= $176,966.27

PV= 176,966.27/(1.06^9)= $104,746.06

C) i= 16%

FV= $269,785.02

PV= $70,940.77