Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:**Table 13.2: Present Value of an Annuity of $1**
This table provides the present value of an annuity of $1 received annually for a certain number of periods, given different interest rates. The values listed are factors used to calculate the present value of annuities.
- **Period (rows):** Represents the number of periods (years) over which the annuity is received, ranging from 1 to 50 periods.
- **Interest Rates (columns):** Given as percentages, ranging from 0.5% to 12%.
**How to Use the Table:**
1. Identify the interest rate for your annuity.
2. Find the row corresponding to the number of annuity periods.
3. The intersecting value is the factor to use to find the present value.
For example, if the annuity is received for 10 periods at an interest rate of 5%, the present value factor is 7.7217.
**Detailed Explanation:**
In financial calculations, this table helps determine what a series of future payments is worth in today's terms, considering the time value of money. Lower interest rates will result in higher present values, as the discounting effect is less pronounced. Conversely, higher interest rates decrease the present value factor, reflecting greater discounting of future payments.
**Note:** This table assumes that payments are made once per period (yearly), and the interest rate is compounded annually.
Transcribed Image Text:**Instructions:**
Using the annuity table, complete the following. (Use Table 13.2)
**Note:** Do not round intermediate calculations. Round your answer to the nearest cent.
| Payment amount end of each period | Frequency of payment | Length of time | Interest rate | PV of Annuity |
|-----------------------------------|----------------------|----------------|---------------|---------------|
| $1,450 | Annually | 7 years | 9% | |
**Explanation:**
The table requires calculating the present value (PV) of an annuity. The given details include:
- **Payment amount at the end of each period:** $1,450
- **Frequency of payment:** Annually
- **Length of time:** 7 years
- **Interest rate:** 9%
The task is to use Table 13.2 (the annuity table) to find the present value of the annuity based on the specified interest rate and duration.
Expert Solution
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Present value of annuity is the equivalent amount based on the future cash flow and interest rate and time period of cash flow.
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