A lottery winner must decide between receiving $5,000 at the end of every month for 10 years or one lump sum of $1,000,000 after 10 years. What semi-annually compounded nominal rate of interest would make the two options equal in value?

Question

Quizplus · Accepted Answer

To find the nominal rate that makes the two options equal, calculate the present value of the annuity and the lump sum. The annuity's present value is calculated using the formula for the present value of an annuity, and the lump sum is discounted back to the present value using the formula for compound interest. Solving these equations gives a nominal rate of 9.774% that equates the two options.

A Lottery Winner Must Decide Between Receiving $5,000 at the End