# A 10-year annuity pays $2,500 per month, and payments are made at the end of each month. The...

## Question:

A 10-year annuity pays $2,500 per month, and payments are made at the end of each month. The interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded monthly thereafter? What is the present value of the annuity?

## Present Value of Annuity:

An annuity is a financial asset that pays a fixed amount of cash for a specific period of time. Suppose the periodic payment from the annuity is {eq}M{/eq}, and the duration of the annuity is {eq}T{/eq}, the present value of the annuity at a periodic discount rate of {eq}R{/eq} is given by {eq}\displaystyle\sum_{t=1}^{T}\frac{M}{(1 + R)^t} {/eq}.

## Answer and Explanation: 1

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View this answerThe present value is $211,407.

For the first 4 years (or 48 months), monthly interest rate is 9%/12 = 0.75%. For the next 6 years, monthly interest...

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Chapter 8 / Lesson 3Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.

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