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Difference between annuity and perpetuity

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Reference no: EM133227482

Part I

1. What is the difference between an annuity and a perpetuity?

2. What is the difference between an ordinary annuity and an annuity due?

Part II

Calculate the value required for each problem. It shows the formula used and the computations for each problem.

1. José Luis has the opportunity to make an investment that requires a payment of $750 per year for the next twelve years. If the investment is made at an interest rate of 8%, what is the value of that investment today?

2. What is the present value of an investment that guarantees a payment of $22,500 per year for the next five years if the compound annual interest rate is 15%?

3. Roberto Homar is planning to invest $25,000 per year for the next seven years, an investment that will pay him compound annual interest of 11.4%. How much money will Roberto have at the end of the seven years?

4. Cecilia Thomas is 25 years old and is planning to invest $3,000 a year in an IRA that pays 9.75% interest compounded annually, until she retires at age 65. How much money will Cecilia have for her retirement?

5. How much would you pay today for a perpetuity of $1,000 per year if the prevailing interest rate is 5.25%?

6. For how much would you buy a preferred stock that pays a $5 annual dividend if you require a return of 12% annual interest?

7. Determine how much you would pay in total, interest and principal, at the end of the 30 years of your mortgage at 3.99% interest compounded monthly, if the monthly payment is $675.00.

8. How much would you have to pay monthly for the car you want to buy if the cost of the car is $30,000 and it is financed at 5.75% interest compounded for six years without having to pay soon?

9. How much money will you have paid at the end of ten years if you pay $10,000 for an equipment lease at the beginning of each year and the compound annual interest rate is 4.75%?

10. From the previous exercise, calculate how much you will pay at the end of ten years, if you pay $10,000 per year at the end of each year instead of at the beginning of the year. Which option suits you best?

Reference no: EM133227482

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