Your mother has an annuity that will give her monthly payments for 13 years. She tell you it is worth $121,294 today. If her required return is 9.91%, what is the monthly payment?
Your mother has an annuity that will give her monthly payments for 13 years. She tell you it is worth $121,294 today. If her required return is 9.91%, what is the monthly payment?
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:Your mother has an annuity that will give her monthly payments for 13 years. She tell you it is worth $121,294 today. If her required return is 9.91%,
what is the monthly payment?
Expert Solution
Step 1
The present value of annuity due is calculated with the series of annuity payments which is discounted to the present by giving effect to the time value of money. It is calculated to make such a decision that either to take lump sum payment now or receive a series of cash payment in future. This is computed with the help of discounting rate in order approximately matches with the current rate of return on investment. the present value become lower when discounting rate is higher and present value become higher when discounting rate is lower.
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