Financial Maths Flashcards
1
Q
What is the fair value of a ten-year £5,000 annuity, if the current interest rate is 6%?
A
36,800
P=PMT× (1- (1/((1+r)^n)))/r
where:
P=Present value of an annuity stream
PMT=Dollar amount of each annuity payment
r=Interest rate (also known as discount rate)
n=Number of periods in which payments will be made
2
Q
An investor puts £20,000 on deposit at a compound rate of 6% and withdraws £600 at the end of each year. After nine years, what is the value of the deposit?
A
£26,895
The £600 withdrawals at the end of each year are annuities. The present value of this is calculated and subtracted from the initial £20,000 to be deposited. The remainder (£20,000 - Present value of nine-year £600 annuity) is then compounded at 6% over nine years.
