{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Section3.34

# Section3.34 - Discounted Value of An Ordinary Simple...

This preview shows pages 1–6. Sign up to view the full content.

Discounted Value of An Ordinary Simple Annuity (section 3.3) Consider the following An ordinary simple annuity consisting of n -payments of \$1 we wish to determine the present value, A , of these payments at the beginning of the term that is, what is the present value one interest period before the first payment is due to be made?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
We denote the above sum by the symbol i n a | (read: a -angle- n -at- i ) i n a | = i i n - + - ) 1 ( 1 This is called the discount factor for n -payments
Notes 1. If the ordinary simple annuity consisted of n -payments of \$ R , then the discounted or present value is: S = R i n a | = R i i n - + - ) 1 ( 1 2. Relationship between A and S to determine the relationship, let’s draw a time diagram:

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Examples of Where Present Values of Annuities are Used 1. Take out a loan and repay it with periodic payments 2. Invest a sum of money today in order to withdraw payments every period over time 3. You buy an investment that pays \$ R every period for n -periods; the price you pay for this investment is: 4. Present values can be used to make a business decision by comparing different financial assets
Example 3.3.1 You can buy a car for \$5000 down and payments of \$299 per month for 5 years. The financing rate is j 12 = 9%. What is the equivalent purchase price of the car?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}