LO 4.2.3: Calculate a serial (inflation-adjusted) payment.

Question 1

What is a serial payment

Answer 1

• A payment that increases at a constant rate (usually the annual rate of inflation) to protect the client’s purchasing power
• • A serial payment is an inflation-adjusted payment.
• Also applicable when client is expecting salary or wage increases with which to make an increasing payment
• Used for calculation of retirement needs and funding a child’s education.

Question 2

How do serial payments differ from fixed annuity payments (both ordinary annuities [END] and annuity due [BEG] payments)

Answer 2

• The payments themselves are increasing at a constant rate
• The result is that the initial serial payment will be less than that of a fixed annuity, but the last serial payment will be more than that of a fixed annuity.

Question 3

How is the serial payment calculated

Answer 3

• By using an inflation-adjusted rate of return, and this becomes the interest rate (I/YR) entered into the calculator
• With the N, FV, and inflation-adjusted rate (I/YR) inputted into their respective register, you solve for PMT to find the value in today’s dollars needed to reach that FV.
• NOTE: For the first year’s payment, you have to multiply the value in today’s dollars by 1 + inflation rate.
• The second year’s payment is increased by the assumed rate of inflation, and so on. (149)