Lionel wants to set up a fund for his son's education such that he could withdraw...

Lionel wants to set up a fund for his son's education such that he could withdraw $1,295.00 at the beginning of every 3 months for the next 6 years. If the fund can earn 3.30% compounded semi-annually, what amount could he deposit today to provide the payment?

Solutions

Expert Solution

Particulars	Amount
Given APR	3.30%
Given compounding frequency per year	2
Effective annual rate	3.327%
(1+ 0.033/2)^2 -1
Required compounding frequency per year	4
Req period effective rate	0.8216%
(1+ 0.03327225)^1/4 -1
Required APR	3.28650%
0.00821625*4

	Present value of annuity due=	P* [ [1- (1+r)^-(n-1) ]/r ] + P


P=	Periodic payment	1,295.00


r=	Rate of interest per period:
	Annual rate of interest	3.28650%
	Frequency of payment	once in every 3 months
	Payments per year	12/ 3=	4
	Interest rate per period	0.032865/4=	0.822%

n=	number of payments:
	Number of years	6
	Payments per year	4

	number of payments	24


	Present value of annuity=	1295* [ [1- (1+0.008216)^-(24-1)]/0.008216 ] +1295

	Present value of annuity=	28,334.14

Answer is:

28,334.14

please rate.

jeff jeffy answered 1 year ago

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