Suppose you just bought a 20-year annuity of $6,700 per year at the current inte

Question

Suppose you just bought a 20-year annuity of $6,700 per year at the current interest rate of 10 percent per year. What is the value of your annuity today? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) Present value $ What is the present value if interest rates suddenly drop to 5 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) Present value $ What is the present value if interest rates suddenly rise to 15 percent?

Explanation / Answer

Annuity Amount = $6700 per year

Time period = 20 years

Present value = C[1-(1+i)-n/i]

Here C = Cash flow per period

I = Interest Rate

n = No. of years

SO if Interest Rate is 10% Than present value is=$6700[1-(1+.10)-20/.10]

= $57040.88

SO if Interest Rate is 5% Than present value is=$6700[1-(1+.05)-20/.05]

=$83496.81

SO if Interest Rate is 15% Than present value is=$6700[1-(1+.15)-20/.15]

= $41937.52

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