Question

Find the present value of the following ordinary annuity. Term Interest Rate Periodic Payment $2900 Payment Interval 6 months 6 months 4 years 4% Conversion Period quarterly Period 4 years 4%

Answer 1

Answer 1:

Interest is compounded quarterly. But annuity payment is semiannual.

Effective annual rate = (1 + 4%/ 4) ⁴ - 1 = 4.060401%

Semiannual rate = (1 + 4.060401%) ^1/2 - 1 = 2.01%

Given:

PMT = $2,900

Semiannual periods = 4 * 2 = 8

Hence:

Present value = PV(rate, nper, pmt, fv, type) = PV (2.01%, 8, -2900, 0, 0) = $21234.74

Present value = $21,234.74