14 Suppose you just bought an annuity with 25 annual payments of $7.900 per year

Question

14 Suppose you just bought an annuity with 25 annual payments of $7.900 per year at the current interest rate of 12 percent per year. 9 What is the value of your annuity today? (Do not round intermediate calculations and 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 7 a. eBook b. percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What if interest rates suddenly rise to 17 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Annual deposit at 12 percent b. Annual deposit at 7 percent c. Annual deposit at 17 percent

Explanation / Answer

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$7900[1-(1.12)-25]/0.12

=$7900*7.843139112

=$61960.80(Approx).

2.Present value=$7900[1-(1.07)^-25].0.07

=$7900*11.65358318

=$92063.31(Approx)

Hence value would increase by=$92063.31-$61960.80

=$30102.51(Approx).

3.Present value=$7900[1-(1.17)^-25].0.17

=$7900*5.766233608

=$45,553.25(Approx)

Hence value would decrease by=$61960.80-$45,553.25

=$16407.55(Approx).

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