Go Back   The Finance Forums > Finance forums > Homework

Homework Get help with your finance related homework.

Thread Tools
Old 07-29-2012, 06:28 AM
helpneeded helpneeded is offline
Junior Member
Join Date: Jul 2012
Posts: 1
Default Annuity every other year Q- plz help

Hi, can someone help me understand how to solve this?

a. Calculate the present value of an annuity that makes a payment of $1,000,000 every other year for 10 payments with the first payment being made exactly two years from now. Hint: Use the standard annuity formula, but let the “period” be two years (rather than just one year) and use the effective two-year rate implied by the annual effective rate of 5 percent.
Reply With Quote

Old Sponsors
Old 07-30-2012, 08:28 AM
ArcSine ArcSine is offline
Join Date: Oct 2010
Location: North Carolina, USA
Posts: 89
Default Re: Annuity every other year Q- plz help

The setup is that you have a 5-period, 5-payment annuity. First payment is at the end of the first (2-year) period; hence, you'll wanna use the shortcut formula for an "ordinary" annuity.

The only wrinkle is that you'll need to first determine the per-period rate. For this, think of it as being the two-year rate which would make someone indifferent between investing a dollar for two years at this two-year rate, vs. investing that same dollar for two consecutive one-year periods.

If the one-year rate is r, someone investing for two consecutive years would end up with (1 + r)^2 dollars at maturity. Hence, they'd be just as happy to get into a 2-year deal which offered a one-period (2-year) rate of (1 + r)^2 - 1.

Take it from here?
Reply With Quote


Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

» Boards

All times are GMT -4. The time now is 06:40 PM.

Powered by vBulletin® Version 3.8.5
Copyright ©2000 - 2019, Jelsoft Enterprises Ltd.