Step 1 The present value of an annuity is the amount needed now so that desired annuity payments may be made in the future. Since payments will be made at the end of each three months, this is an ordinary annuity. To find the present value of this annuity, the amount of money that should be deposited in an account now, the interest rate per period must first be found. The interest rate per period is calculated using the nominal, or annual, rate and the number periods per year as follows. nominal rate interest rate per period = periods per year The rate was given to be 6%. Interest is compounded quarterly, or 4 times per year. Find the interest rate per period. nominal rate interest rate per period = periods per year % 4 The total number of compounding periods will be the number of years interest will accrue multiplied by the number of compounding periods per year. There are 4 compounding periods per year and annuity payments will be made for 3 years. Find the total number of periods of the annuity. total number of annuity periods = number of years x number of compounding periods per year = 3x
Step 1 The present value of an annuity is the amount needed now so that desired annuity payments may be made in the future. Since payments will be made at the end of each three months, this is an ordinary annuity. To find the present value of this annuity, the amount of money that should be deposited in an account now, the interest rate per period must first be found. The interest rate per period is calculated using the nominal, or annual, rate and the number periods per year as follows. nominal rate interest rate per period = periods per year The rate was given to be 6%. Interest is compounded quarterly, or 4 times per year. Find the interest rate per period. nominal rate interest rate per period = periods per year % 4 The total number of compounding periods will be the number of years interest will accrue multiplied by the number of compounding periods per year. There are 4 compounding periods per year and annuity payments will be made for 3 years. Find the total number of periods of the annuity. total number of annuity periods = number of years x number of compounding periods per year = 3x
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Tutorial Exercise
Suppose that your bank pays 6% interest, compounded quarterly. Use Table 12-2 to find how much should be deposited now to yield an annuity payment of $1,600 at the end of each three months, for 3 years.
Step 1
The present value of an annuity is the amount needed now so that desired annuity payments may be made in the future. Since payments will be made at the end of each three months, this is an ordinary annuity. To find the present value of this annuity, the
amount of money that should be deposited in an account now, the interest rate per period must first be found.
The interest rate per period is calculated using the nominal, or annual, rate and the number of periods per year as follows.
nominal rate
interest rate per period =
periods per year
The rate was given to be 6%. Interest is compounded quarterly, or 4 times per year. Find the interest rate per period.
nominal rate
interest rate per period
periods per year
4
|%
The total number of compounding periods will be the number of years interest will accrue multiplied by the number of compounding periods per year. There are 4 compounding periods per year and annuity payments will be made for 3 years. Find the total
number of periods of the annuity.
total number of annuity periods = number of years x number of compounding periods per year
= 3 x
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