Find the future values of the following ordinary annuities: a. FV of $200 paid e

Question

Find the future values of the following ordinary annuities:

a. FV of $200 paid each 6 months for 5 years at a nominal rate of 14% compounded semiannually. Round your answer to the nearest cent.

b. FV of $100 paid each 3 months for 5 years at a nominal rate of 14% compounded quarterly. Round your answer to the nearest cent.

c. These annuities receive the same amount of cash during the 5-year period and earn interest at the same nominal rate, yet the annuity in part b ends up larger than the one in part a. Why does this occur?

Explanation / Answer

answer a) Given that - FV= ? year 5 interest rate 14% compounded semi-annually 6 month interest rate 7.0% Period = 5*2 10 Annuity 200 computation of future value using financial calculator I= 7.00% PV= 0 PMT= $    200.00 N=                10 FV= ? Compute of future value $2,763.29 answer a) Given that - FV= ? year 5 interest rate 14% compounded semi-annually 3 month interest rate 3.5% Period = 5*4 20 Annuity 100 computation of future value using financial calculator I= 3.50% PV= 0 PMT= $    100.00 N=                20 FV= ? Compute of future value $2,827.97 answer c) NPV in case b is higher compared to case a - this is due to fact that interest rate is compounded quarterly in case b. Interest earned each quarter will also get interest. Hence, future value is also higher.

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