Question

Suppose payments will be made for 9 1 4 years at the end of each month from an ordinary annuity earning interest at the rate of 3.75%/year compounded monthly. If the present value of the annuity is $46,000, what should be the size of each payment from the annuity

Answer 1

To calculate the size of each payment from the annuity, use the present value formula. The size of each payment from the annuity should be approximately $388.88.

Step-by-step explanation:

To calculate the size of each payment from the annuity, we need to use the present value formula. The present value of the annuity is given as $46,000. The interest rate is 3.75% per year, compounded monthly. The annuity will be paid for 9 1/4 years, which is a total of 111 months.

Using the present value formula:

1. Present Value = Payment * (1 - (1 + interest rate/number of periods)^(-number of periods))) / (interest rate/number of periods)
2. Plugging in the values, we have: 46000 = Payment * (1 - (1 + 0.0375/12)^(-111))) / (0.0375/12)
3. Solving for Payment, we find that the size of each payment from the annuity should be approximately $388.88.