Question

A three-year annuity-immediate will be issued a year from now with annual payments of 5,000. Using the forward rates, calculate the present value of this annuity a year from now.

Answer 1

13,152.5

Step-by-step explanation:

Given the the above parameters as mentioned in the question

To calculate the PV (Present Value)

We have PV = 5000 * 1.05 * [ 1/(1.0575)² + 1/(0.625)³ + 1/(1.065)⁴]

PV = 5000 * 1.05 * (0.8942094350 + 0.8337064929 + 0.7773230908) =

=> PV = 5000 * 1.05 * 2.5052390187

= 13,152.50

Therefore, in this case, using the forward rates, the present value of this annuity a year from now is 13,152.50