Question

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Two annuities with the same effective annual interest rates have the same present value: • a)...

Two annuities with the same effective annual interest rates have the same present value:

• a) a 10 year annuity-immediate with annual payments of $55

• b) a 20 year annuity immediate with annual payments of $20 for the first 10 years, and then $77 for the next 10 years.

Find this common present value.

Expert Solution

let the common annual effectivr interest rate be = i

Present value of the First Annuity immediate =

=> Present value of the First Annuity immediate =

Present value of second Annuity immediate =

hence

=>i = 0.0820373898 or 8.20373898%.

Hence present value of First annuity=

Present value of second Annuity immediate =

=>365.6869

Hnece the common PRESENT VALUE = 365.6869

jeff jeffy answered 2 years ago

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