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Today is Elsir’s birthday and since he lost all his savings betting on risky derivatives, he...

Today is Elsir’s birthday and since he lost all his savings betting on risky derivatives, he would like us to buy him an annuity as a birthday present. He would like to receive $100 per month for the next 5 years. He would like to receive the first payment today. If interest rates are 7% EAR, how much will it cost us to buy this for him?
Select one:
a. $5104.87
b. $5076.17
c. $5000.00
d. $5243.62
e. None of the above.

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Answer #1

Since EAR =7%, the monthly rate will be calculated as:

(1+R)^12 = 1.07

R = 0.5654%.

Hence, the present value equation will be written as:

PV = 100 x ( 1 + 1/1.005654^1 + 1/1.005654^2 + ... + 1/1.005654^59) = 5104.87 Option A.

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