In: Finance
You manage an investment fund that sells annuities. You sell a 8-year ordinary level annuity that makes monthly payments of $2,419 per month, starting next month. If interest rates are 3.79% APR (compounded monthly) what is the current price of this annuity?
Solution:-
Here given PMT = $2,419
Interest per year = 0.0379/12 = 0.003158
Time period N= 8 * 12 = 96
PV = PMT * [1-(1+i)-n] / i
PV = $2,419 * [1 - (1+0.003158)-96] / 0.003158
= $2,419 * [1 - 0.7388] / 0.003158
= $2,419 * 0.2612 / 0.003158
= $2,419 * 82.71
= $200,075.49
Therefore the current price of this annuity is $200,075.49