AuthorTopic: PV question?
nemke
@2010-06-06 12:04:01
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?
Much appreciated!
joe3
@2010-06-17 10:07:01
Hi nemke,

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.
TheProfet
@2010-06-22 22:01:00
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)
[CMPT]
[PV] = 3,680.04

and we're done.

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