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Your parents are retiring and want to set aside a lump sum earning $8 \%$ annual interest compounded quarterly to pay out $\$ 5,000$ quarterly for ten years. What lump sum should your parents set aside today?

Solution

VerifiedTo find how much they should invest in a lump sum now to provide a stream of payments, we need to find the present value of a quarterly ordinary annuity of $\$5,000$ for ten years at $8\%$ annual interest compounded quarterly using given table. To do so, first we need to find the number of interests period and period interest rate as follows:

$\begin{align*} 10\text{ years} \times 4 \text{ periods per year}&=40 \text{ periods}\\ \\ \frac{8\% \text{ annual interest rate}}{4 \text{ periods per year}}&=2\% \text{ period interest rate} \end{align*}$

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