This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Math 006 (Lecture 4) Present Value of an Annuity Example 1. How much should you deposit in an account paying 6% compounded semi annually in order to be able to withdraw $1000 every 6 months for the next 3 years? (After the last payment is made, no money is to be left in the account) In general, if R is the periodic payment, i is the interest rate per period, and, n is the number of periods, then the present value of all payments is given by S = R (1 + i ) 1 + R (1 + i ) 2 + · · · + R (1 + i ) n . 1 We now introduce the formula of the present value of an annuity in the term of the notations used in finance. Theorem 1. Let PV = present value of all payments, PMT = periodic payment, i = interest rate per period and n = number of payments. We have PV = PMT 1 (1 + i ) n i = PMTa n e i where a n e i = 1 (1 + i ) n i . Example 2. Recently Lion bank offered an ordinary annuity that earned 5% compounded annually. A person plans to make equal annual deposits into this account for 30 years inannually....
View
Full
Document
 Fall '09
 forgot
 Math

Click to edit the document details