Calculating Present Worth and Effective Annual Interest Rate
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Tommy Crews has received a settlement from an insurance company that will pay him $32,500 annually for 10 years. Current interest rates are 6%, compounded semi-annually.
Calculate:
a) What is the effective annual interest rate?
b) How much is the present worth of Tommy's settlement?
c) How much is the present worth of Tommy's settlement if payments are made at the beginning of each year?
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Solution Summary
This solution involves calculations of present worth and effective annual interest rate.
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a) EFF(%) = [(1 + (INOM/M))^m] - 1
= [(1 + (0.06/2))^2] - 1
= 0.0609 = 6.09%
b) Using financial calculator:
N ...
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