You start an annuity with $1million and expect to receive 12 equal payments beginning at the end of the first year.The guaranteed annual interest rate is 6 percent.The annual payments that you expect to collect are

Question

Quizplus · Accepted Answer

Using the formula for annuity payments:
PMT = (PV * r) / (1 - (1 + r)^(-n))
where PV = Present Value, r = interest rate per period, n = number of periods, and PMT = payment per period

PV = $1,000,000
r = 6% / 12 = 0.5% per month
n = 12 (since there are 12 equal payments)
PMT = ($1,000,000 * 0.005) / (1 - (1 + 0.005)^(-12))
PMT = $119,277.03

Therefore, the annual payments that you expect to collect are $119,277.03, which is found in choice B.

You Start an Annuity with $1million and Expect to Receive