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Chapter 4: 4-9-30BP (page 283)

Question: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

a. What single payment could be made at the beginning of the first year to achieve this objective?

b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?

Short Answer

Expert verified

Answer

The required amount of annual payment at the beginning and at the end is $1,851.91 and $2,000.06, respectively.

Step by step solution

01

Identification of the required information

Future value (FA) = $28,974

Periods for annual compounding (n) = 10

Interest Rate for annual compounding (i) = 8%

02

(a) Requisite amount of payment (PMT)

FA=PMT脳[1+in+1-1i-1]$28,974=PMT脳[(1+8%)10+1-18%-1]PMT=$1,851.91

03

(b) Requisite amount of payment (PMT)

FA=PMT脳[(1+i)n-1i-1]$28,974=PMT脳[(1+8%)10-18%-1]PMT=$2,000.06

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Most popular questions from this chapter

Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for these maturity dates:

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b. 15 years.

c. 1 year.

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How is the valuation of any financial asset related to future cash flows?

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