An individual has just received a settlement form the insurance company of $500,

Question

An individual has just received a settlement form the insurance company of $500,000. He decides to invest the entire amount into a Treasury note for 10 years paying 4% annual interest (compounded semi-annually). After the ten years, the individual wishes to purchase and annuity and receive monthly payments for 30 years. Assume the annuity will pay 5% annual interest. A) What would be the monthly payments? B) How much interest for the entire period will he have received? (Count both the 10 year Treasury and the 30 year annuity).

Explanation / Answer

A)

B)

Treasury note value after 10 years PV×(1+r)^n Here, 1 Interest rate per annum 5.00% 2 Number of years                                        10 3 Number of compoundings per per annum                                          2 1÷3 Interest rate per period ( r) 2.50% 2×3 Number of periods (n) 20 Present value (PV) $                         500,000 Treasury note value after 10 years $                         819,308 500000*(1+2.50%)^20

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