Explanation Approach: An annuity is a regular stream of equal payments, made at equal intervals. If the payment is made at the end of every compounding period, it is called an ordinary annuity. The future value of an annuity is the amount paid along with the interest earned on the payments. The future value of an annuity depends upon interest rate, size and number of the payments. Formula for finding future value of an ordinary annuity: A = R ( 1 + r m ) n - 1 r m Here A = The future value R = The size of the payment r = The annual nominal interest rate m = The number of times interest is compounded in a year. n = Number of payments In order to calculate the expression: 1) Solve the ratio r m and add 1 into it 2) Raise ( 1 + r m ) to n power and subtract 1 from it. 3) Divide the amount by ratio r m 4) Multiply the quantity by R . By making regular payments in to an annuity for many years, the value of annuity becomes big due to compounding of interest. Calculation: The period from January to April is 4 months. Using R = $ 200 , r = 3 % , m = 12 , n = 4 , We solve to find the future value of an ordinary annuity, in order to find the amount available for our vacation, by May 1

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ISBN: 9780134434681

Author: Tom Pirnot

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Chapter 8.4, Problem 6E

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The future value of an ordinary annuity of monthly payment $200, yearly interest rate, 3%; May1.

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The future value of an ordinary annuity of monthly payment $200, yearly interest rate, 3%; May1.

Solution Summary: The author explains that an annuity is a regular stream of equal payments, made at equal intervals. The future value depends upon interest rate, size, and number of payments.

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To find:

The future value of an ordinary annuity of monthly payment $200, yearly interest rate, 3%; May1.