Question

Interest rate with annuity.  What are you getting in terms of interest rate if you are willing to pay ​$11 comma 000 today for an annual stream of payments of ​$2 comma 500 for the next 10 ​years? The next 20 ​years? The next 50 ​years? ​ Forever? What are you getting in terms of interest rate if you are willing to pay ​$11 comma 000 today for an annual stream of payments of $ 2 comma 500 for the next 10 ​years? nothing​% ​(Round to two decimal​ places.) What are you getting in terms of interest rate if you are willing to pay ​$11 comma 000 today for an annual stream of payments of $ 2 comma 500 for the next 20 ​years? nothing​% ​(Round to two decimal​ places.) What are you getting in terms of interest rate if you are willing to pay ​$11 comma 000 today for an annual stream of payments of $ 2 comma 500 for the next 50 ​years? nothing​% ​(Round to two decimal​ places.) What are you getting in terms of interest rate if you are willing to pay ​$11 comma 000 today for an annual stream of payments of $ 2 comma 500 ​forever? nothing​% ​(Round to two decimal​ places.)

Answer 1

Answer a.

Value of Annuity = $11,000
Annual Payment = $2,500
Period of Annuity = 10 years

Let interest rate be i%

$11,000 = $2,500 * PVIFA(i%, 10)

Using financial calculator:

N = 10
PV = -11000
PMT = 2500
FV = 0

I = 18.60%

Interest Rate is 18.60%

Answer b.

Value of Annuity = $11,000
Annual Payment = $2,500
Period of Annuity = 20 years

Let interest rate be i%

$11,000 = $2,500 * PVIFA(i%, 20)

Using financial calculator:

N = 20
PV = -11000
PMT = 2500
FV = 0

I = 22.32%

Interest Rate is 22.32%

Answer c.

Value of Annuity = $11,000
Annual Payment = $2,500
Period of Annuity = 50 years

Let interest rate be i%

$11,000 = $2,500 * PVIFA(i%, 50)

Using financial calculator:

N = 50
PV = -11000
PMT = 2500
FV = 0

I = 22.73%

Interest Rate is 22.73%

Answer d.

Value of Annuity = $11,000
Annual Payment = $2,500
Period of Annuity = Forever

Let interest rate be i%

$11,000 = $2,500 / i
i = 22.73%

Interest Rate is 22.73%