Question

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

Solution

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Answered 1 year ago
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To 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\$5,000 for ten years at 8%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:

10 years×4 periods per year=40 periods8% annual interest rate4 periods per year=2% period interest rate\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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