Malcolm wants to purchase an annuity that will pay him $7,000 at the end of every three months for 15 years. His financial advisor has told Malcolm that this annuity will cost him $250,000. What monthly compounded nominal interest rate was used in this calculation?

Question

Quizplus · Accepted Answer

The calculation involves finding the nominal interest rate compounded monthly that equates the present value of the annuity payments to the purchase price of the annuity. Given the quarterly payment of $7,000 for 15 years (or 60 periods), and an initial investment of $250,000, we can use the present value of an annuity formula. However, since the exact formula and calculations are not provided, we typically would use financial calculators or software to solve for the nominal interest rate. The correct answer, based on the information provided, is 7.51%, which indicates the nominal annual interest rate compounded monthly that would make the present value of these annuity payments equal to $250,000.

Malcolm Wants to Purchase an Annuity That Will Pay Him