Section3.34

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

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Unformatted text preview: 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? 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, lets draw a time diagram: 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?...
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This note was uploaded on 04/14/2010 for the course ACSCI 2053 taught by Professor Kopp during the Spring '09 term at UWO.

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

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