You are considering an investment in a 40-year security.The security will pay $25 a year at the end of each of the first three years.The security will then pay $30 a year at the end of each of the next 20 years.The simple interest rate is assumed to be 8 percent,and the current price (present value)of the security is $360.39.Given this information,what is the equal annual payment to be received from Year 24 through Year 40 (i.e. ,for 17 years)?
A) $35
B) $38
C) $40
D) $45
E) $50

Question

Quizplus · Accepted Answer

To find the equal annual payment for years 24-40, we need to first calculate the present value of those payments and then use the present value formula to solve for the equal annual payment.

The present value of the payments from year 24-40 can be calculated as follows:

PV = $30*(1-1/(1.08)^17)/0.08 = $278.34

Now we can use the present value formula:

PV = PMT*(1-1/(1.08)^17)/0.08

$278.34 = PMT*(1-1/(1.08)^17)/0.08

Solving for PMT gives us:

PMT = $40

Therefore, the equal annual payment to be received from Year 24 through Year 40 is $40. The correct answer is (C).

You Are Considering an Investment in a 40-Year Security