|Author||Topic: PV question?|
|Please can someone help with this. i have the answer but don't understand how you get to it?
1. Compute the PV of an annuity that pays $1000 per year in semmi annual installments over 5 years, using an interest rate of 12%, compounded semmiannually?
Answer is : $ 3680.04 but how?
I consider this problem as follows.
1. The total payment times(N) is 10 in 5 years.
2. Each time the payment(A) is $500.
3. The semiannually interest(r) is 12%/2=6%
then you can get the PV through the formula:
PV = A*(1-1/(1+r)^N)/r
so you can get
PV = 500 * (1 - 1/(1+ 0.06)^10)/0.06 = 3680.04
Wish this could help you.
|using a calculator (as you would on the exam), you would answer this question as follows:
(Using a TI BA II Plus Calculator)
PMT = -500 (1000/2 for semiannual payments)
N = 10 (5 yrs * 2 for semiannual payments)
i/y = 6 (12/2 for semiannual payments)
[PV] = 3,680.04
and we're done.