Suppose the interest rate is 9% APR with monthly compounding. What is the present value of an annuity that pays $250 every three months for the next five years closest to? Convert APR to EAR and then use Texas Instruments BA II to solve using:
N:
I/Y:
PV:
PMT:
FV:
The present value of an annuity that pays $250 every three months for the next five years is closest to
A) $2280
B) $3985
C) $3990
D) $3995
1). Monthly rate = 9%/12 = 0.75%
EAR = [(1+0.75%)^12] -1 = 9.38%
This EAR compounded every 3 months will have a 3-monthly rate of [(1+9.38%)^(1/4)] -1 = 2.267%
N = 4*5 = 20; I/Y = 2.267%, FV = 0; PMT = -250, solve for PV.
PV = 3,984.49 (Option B)
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