You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in the following pattern, repeating every four years:d 6. 2 4 21e 22e 23e 24 $1,600 $1,500 $1,400 $1,300- $1,600 $1,500 $1,400- $1,300 Suppose you don't like the fluctuations in the amount of your annual benefits. a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual (end-of-year) amounts if you required an APR of 14.4%, compounded monthly? b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%, what equal annual (beginning-of-year) payments over the twenty-four year period would be equivalent to the cash flow stream depicted above?
You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in the following pattern, repeating every four years:d 6. 2 4 21e 22e 23e 24 $1,600 $1,500 $1,400 $1,300- $1,600 $1,500 $1,400- $1,300 Suppose you don't like the fluctuations in the amount of your annual benefits. a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual (end-of-year) amounts if you required an APR of 14.4%, compounded monthly? b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%, what equal annual (beginning-of-year) payments over the twenty-four year period would be equivalent to the cash flow stream depicted above?
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 22P
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Transcribed Image Text:You are contemplating the purchase of a twenty-four year (variable) annuity that promises cash flows in
the following pattern, repeating every four years:e
6.
3
21e
22e
23
24
$1,600-
$1,500-
$1,400-
$1,300
$1,600-
$1,500
$1,400
$1,300-
Suppose you don't like the fluctuations in the amount of your annual benefits.
a. What annual rate of return would you use to convert these (end-of-year) cash flows to equal annual
(end-of-year) amounts if you required an APR of 14.4%, compounded monthly?
b. Without prejudice to your answer in part a, suppose that your required annual rate of return is 15%,
what equal annual (beginning-of-year) payments over the twenty-four year period would be
equivalent to the cash flow stream depicted above?
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