A savings plan requires an investor to pay 10 installments, each one of $500, due at the end of every year for 10 years. One year after the last of such installments the bank will start making annual payments to the investor, each one for a fixed amount P, for n years. Assume an effective interest rate of 5% p.a. (a) If n = 7 determine the value of P. (b) If n = ∞, i.e. payments from the bank continue indefinitely, determine the value of P.

A savings plan requires an investor to pay 10 installments, each one of $500, due at the end of every year for 10 years. One year after the last of such installments the bank will start making annual payments to the investor, each one for a fixed amount P, for n years. Assume an effective interest rate of 5% p.a. (a) If n = 7 determine the value of P. (b) If n = ∞, i.e. payments from the bank continue indefinitely, determine the value of P.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.

Question

3. * A savings plan requires an investor to pay 10 installments, each one of $500, due at the
end of every year for 10 years. One year after the last of such installments the bank will
start making annual payments to the investor, each one for a fixed amount P, for n years.
Assume an effective interest rate of 5% p.a.
(a) If n 7 determine the value of P.
=
(b) If n
=
∞, i.e. payments from the bank continue indefinitely, determine the value of P.

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a) Calculation of P when n = 7 years

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