You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in the following pattern, repeating every four years: 00 14 20 34 $1,600 $1,500€ $1,400 $1,300 214 $1,600 22 23 24€ $1,500 $1,400 $1,300 2 Suppose you don't like the fluctuations in the amount of your annual benefits.< a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual (end-of-year) amounts if you required an APR of 14.4%, compounded monthly?< b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%, what equal annual (beginning-of-year) payments over the twenty-four year period would be equivalent to the cash flow stream depicted above?
You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in the following pattern, repeating every four years: 00 14 20 34 $1,600 $1,500€ $1,400 $1,300 214 $1,600 22 23 24€ $1,500 $1,400 $1,300 2 Suppose you don't like the fluctuations in the amount of your annual benefits.< a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual (end-of-year) amounts if you required an APR of 14.4%, compounded monthly?< b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%, what equal annual (beginning-of-year) payments over the twenty-four year period would be equivalent to the cash flow stream depicted above?
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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Transcribed Image Text:You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in
the following pattern, repeating every four years:
4
21e
22e
23e
24e
$1,600 $1,500 $1,400 $1,300
$1,600 $1,500e $1,400 $1,300
Suppose you don't like the fluctuations in the amount of your annual benefits.
a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual
(end-of-year) amounts if you required an APR of 14.4%, compounded monthly?
b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%,
what equal annual (beginning-of-year) payments over the twenty-four year period would be
equivalent to the cash flow stream depicted above?
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