#1




Basic Annuity Valuation
Hi Everybody,
Here is a very simple problem that I can't solve for some reason. The Question says that you will receive $500K semiannualy with an interest rate of 0,05. R=0,05 here is the annual rate so we need to find the semiannual rate first before we go on. R/2=0,025. The basic PV calculation for 4 periods yields an answer of $1,939,394. PV> 500K/(1,025)^(0,5) + 500K/(1,025)^(1) + 500K/(1,025)^(1,5) +500K/(1,025)^(2)= $1,939,394. This is ok and I understand it but when I put this into Annuity formula I dont get the same result for some reason. My annuity formula is as follows; PV(Annuity)= (500K/0,025)*[11/(1,025)^(4)]= $1,880,987 In Annuity formula above, I just thought that we have 2 periods in a year since we will get paid semiannually and for 2 years, so this means we have in total 4 periods. Where is the flaw here and why doesnt it yield the same result as simple discounting? Thanks in advance 
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