Question

We Pay Insurance Co. will pay you $1,350 each quarter for 23 years. You want to earn a minimum interest rate of .95 percent per quarter. What is the most you are willing to pay today for these payments?

Answer 1

In order to calculate the amount you should pay for this investment today, we need to use PV of annuity function, according to which:

PV =

Now, for this question

n = 23 * 4 = 92 quarters, r = 0.95%, P = $1,350

PV = 1350 * 61.1575

PV = $82,562.58 --> Answer

Now, this question is calculated assuming that the payments are made at the end of quarter and hence it is an ordinary annuity. If this annuity made payment at start of the quarter, then it would have been an annuity due, and the price that you would have to pay for it then would have been different (PV of annuity due).