Suppose you just bought a 10-year annuity of $15,500 per year at the current int

Question

Suppose you just bought a 10-year annuity of $15,500 per year at the current interest rate of 11.25 percent per year.

What is the value of the investment at the current interest rate of 11.25 percent? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What happens to the value of your investment if interest rates suddenly drop to 6.25 percent? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What happens to the value of your investment if interest rates suddenly rise to 16.25 percent? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Suppose you just bought a 10-year annuity of $15,500 per year at the current interest rate of 11.25 percent per year.

Explanation / Answer

1.

Value of investment = Present value of annuity

Present value of annuity = Annuity * {1 – (1+r)-n}/r

Value of investment = $15,500{[1 – 1.1125-10] / 0.10} = $101,625.80

2.

Value of investment = $15,500{[1 – 1.0625-10] / 0.10} = $70,463.88

3.

Value of investment = $15,500{[1 – 1.1625-10] / 0.10} = $120,612.40

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