Problem 6-39 Present Value and Interest Rates [LO1] Suppose you just bought a 20

Question

Problem 6-39 Present Value and Interest Rates [LO1]

Suppose you just bought a 20-year annuity of $6,700 per year at the current interest rate of 10 percent per year.

What if interest rates suddenly rise to 15 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Suppose you just bought a 20-year annuity of $6,700 per year at the current interest rate of 10 percent per year.

Explanation / Answer

Present value of annuity = amount per year*present value factor of annuity @10% for 20 years

From the annuity table, we get the PV of ordinary annuity @10%, 20 years = 8.51356

Thus present value = 6700* 8.51356 = $57,040.85

If interest rate is 5%, the PV factor for 20 years will be 12.46221

Thus PV will be 6700* 12.46221 = $83,496.81

if interest rate is 15%, the pv factor is 6.2593

PV = 6700*6.2593 = $41,937.31

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