1. You are thinking about buying an insurance product with the following specifications: the offered insurance...

1. You are thinking about buying an insurance product with the following specifications: the offered insurance product requires you to make payments semi-annually of $50 and do so for the next 20 years (first payment six months from today.). if your required rate of return is 6% per year (i.e. effective), what amount of money should the insurance product offer to pay you at the end of 20 years. Answer explained in Financial Calculator format would be appreciated.

Solutions

Expert Solution

This question is an application of FV of annuity.

It is a semi-annual annuity that lasts for 20 years and has a rate of return of 6%.

Let us define the inputs:

PV = 0, n = 20 * 2 = 40 semi-nnual periods, i/Y = 6%/2 = 3% semi-annually, PMT = - $50 (negative sign indicate it is an out flow)

Step for financial calculator:

Step 1: Clear TVM worksheet first. [2^nd] [CLR TVM] [2^nd] [Quit]

Step 2: Enter 50 through numeric keypad. Press [+/-] to make it -50. Press [PMT]

Step 3: Enter 40 through numeric keypad. Press [N]

Step 4: Enter 3 through numeric keypad. Press [i/Y]

Step 5: Enter 0 through numeric keypad. Press [PV]

Step 5: Press [CPT][FV]. This would display FV = 3,770.06...

Hence, answer is $3,770.96

jeff jeffy answered 1 year ago

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