Strahd bought a 20-year annuity-immediate with payment size 350 at an annual effective rate of 4%....

Strahd bought a 20-year annuity-immediate with payment size 350 at an annual effective rate of 4%. Just after receiving the eighth payment, Strahd’s life forever changed and he sold the remainder of the annuity, reinvesting the proceeds in a level-payment perpetuityimmediate.

What is the payment size K of this perpetuity?

Expert Solution

Calculating Value of Annity after 8th Payment,

Using TVM Calculation,

PV = [FV = 0, PMT = 350, N = 12, I = 0.04]

PV = $3,284.78

Calculating K,

3,284.78 = K + K/0.04

K = $126.34

jeff jeffy answered 2 years ago

Strahd bought a 20-year annuity-immediate with payment size 350 atan annual effective rate of 4%....

Strahd bought a 20-year annuity-immediate with payment size 350 at an annual effective rate of 4%. Just after receiving the eighth payment, Strahd’s life forever changed and he sold the remainder of the annuity, reinvesting the proceeds in a level-payment perpetuityimmediate.What is the payment size K of this perpetuity?

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