Chapter 5, Solutions Cornett, Adair, and Nofsinger

The difference between these perpetuities is $156.86. The value of the perpetuity decreased with an increase in the interest rate.

LG55-26 Present Value of a Perpetuity A perpetuity pays $50 per year and interest rates are 9 percent. How much would its value change if interest rates decreased to 8 percent? Did the value increase or decrease?

Use equation 5-5:

The difference between these perpetuities is $69.45. The value of the perpetuity increased with a decrease in the interest rate.

LG65-27 Future and Present Value of an Annuity Due If you start making $50 monthly contributions today and continue them for 5 years, what’s their future value if the compounding rate is 10 percent APR? What is the present value of this annuity?

Compute the future value using equation 5-2:

Compute the present value using equation 5-4:

LG65-28 Future and Present Value of an Annuity Due If you start making $75 monthly contributions today and continue them for 4 years, what is their future value if the compounding rate is 12 percent APR? What is the present value of this annuity?

First calculate the future values and present values, using equations 5-2 and 5-4, respectively. Using these results, the annuity due values can be computed using equations 5-6 and 5-7, respectively.