(a) An annuity is defined as a series of payments of a fixed amount for a specif
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Question
(a) An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the entire series does contain an annuity. Is this statement true or false? And Why?
(b) Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?
Explanation / Answer
a) $400 per year in years 3 through 10 is an annuity for 8 years. So part of the series does contain an annuity
So the statement is true.
b) Required Interest rate for this investment can be calculated in an excel sheet as follows
=RATE(18,0,-250000,1000000,0) = 8.01%
18 is number of years
250,000 is the present value
1,000,000 is the future value
PV and FV have to be entered with opposite sign
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