You are attempting to price a 25 year annuity due for your insurance company. Payments of...

You are attempting to price a 25 year annuity due for your insurance company. Payments of $3,500 for this annuity due start at the beginning of each year. What is the lowest price your company should offer

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Expert Solution

The lowest price that the company should offer is the present value of the future payments. This is calculated by computing the present value of annuity due. The formula for the computation is as below:

PV of annuity due = Annuity + Annuity*(1-1/(1+rate)^(number of terms-1))/rate

We can see in this formula that the rate of discount is required to for the calculation. In a given scenario the present value of the annuity due and the lowest price that the company should offer will depend upon the discount rate. Hence the lowest price in different scenarios will be as follows:

Rate	Lowest price
1%	77851.86
2%	69698.74
3%	62774.4
4%	56864.37
5%	51795.25
6%	47426.25
7%	43642.67
8%	40350.65
9%	37473.14
10%	34946.6

WORKINGS

jeff jeffy answered 2 years ago

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