Greg C

If it were evaluated with an interest rate of zero percent, a 10-year ordinary annuity would have a present value of $4,000. If the future (compounded) value of this annuity, evaluated at Year 10, is $6,425, what nominal interest rate must the analyst be using to find the future value?

I can see two different ways of doing this problem.

1) With a $4,000 present value at a zero interest rate, the payment amount is equal to the present value divided by the number of periods (10). Thus, the payment amount is 400.

Now that we have the payment amount, we can plug in the rest of the data into the calculator:

FV=6425

PMT=400

N=10

I/Y=?

Computed: I/Y=10.16296890% or 10.16%

or

2)

PV=4000

FV=6425

N=10

I/Y=?

Computed? I/Y=4.85310944

Which one (if either) is correct?

Compute the future value at the end of the year 32 of $150 deposited every month for 22 years (with the first deposit made one month from today) into an account that pays 6 percent p.a. with semi-annual compunding.

OK...here is where I'm stumped. I understand that this is a 2 part question...the first part being an ordinary annuity for 22 years and the second part being a future value of a lump sum for 10 years. It is the ordinary annuity that is troubling me.

Here is what I entered in my finance calculator:

N=44 (22 years * 2 as the interest is compounded semi-annually)

PMT=150 * 6 = 900 (monthly payment * 6 as this is compounded only every six months so we are indiffernet between paying 150 a month or 900 every 6 months)

I/Y=3% (6p.a. / 2 as it is semi-annually compounded)

FV=?

Computed FV = 80,143.56820

Is this accurate or did I put the wrong information in for N and I/Y?