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Problem 3.3 An investor purchases an annuity that will pay a constant payment starting today of $100. Beginning with the payment 12 years from today each payment will be 5% greater than the previous payment. The last payment will be received 25 years from today. The annuity is bought to yield an effective interest rate ofi such that 0.85. What is the purchase price of the annuity today?

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Total payment for 12 years-100 x 12-1200 Payment from 12th year: Final payment-1200(1 +5%)12 = 2155 30-13 Total Payment- 12001200x 12x 10.85 -$8983.78 Purchase price = 8983.78× 0.85 $7636

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