Question

1. Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $230,000, and her life expectancy is 17 more years. Her pension fund manager assumes he can earn a 10 percent return on her assets.

What will be her yearly annuity for the next 17 years?

2. C. D. Rom has just given an insurance company $42,500. In return, he will receive an annuity of $5,800 for 20 years.  

At what rate of return must the insurance company invest this $42,500 in order to make the annual payments?

Answer 1

1.

Accumulated funds = $230,000

Period = 17 years

Interest Rate = 10%

Using TVM calculation for yearly payment,

PMT = [PV = 230000, T = 17, FV = 0, I = 10%]

Yearly Payment = $28,672.75

2.

PV of annuity = $42,500

Yearly payment = $5,800

Period = 20 years

Using TVM calculation for Interest Rate,

I = [PV = 42500, FV = 0, T = 20, PMT = 5800]

I = 12.31%