Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
Bartleby Related Questions Icon

Related questions

Question

You are managing an investment portfolio and sell an “inflation-protected” annuity that pays $3,862 per month (in real terms) for 7 years, starting next month. You forecast that inflation will be 0.45% per month over the 7 years.

If you earn 4.17% APR (monthly compounding) nominal terms on your investments, how much do you need to invest today to fully fund the annuity?

 
Expert Solution
Check Mark
Step 1

The present value is the value of the sum received at time 0 or the current period. It is the value of the sum that will be received in the future period.

Step 2

The annual payment of annuity is $3,862 per month. The time period is 7 years and the annual percentage rate is 4.17%. The inflation rate is 0.45% per month.

Compute the monthly interest rate, using the equation as shown below:

Finance homework question answer, step 2, image 1

Hence, the monthly interest rate is 0.3475%.

Step 3

Compute the present value annuity factor (PVIFA), using the equation as shown below:

Finance homework question answer, step 3, image 1

Hence, the present value annuity factor is 72.7420955105.

bartleby

Step by stepSolved in 5 steps with 3 images

Blurred answer
Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education