A deferred annuity will pay you $500 at the end of each year for 10 years,however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12).What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100.
A) $2,200
B) $2,400
C) $2,900
D) $3,400

Question

Quizplus · Accepted Answer

To calculate the present value of the deferred annuity, we need to find the present value of 10 payments of $500 each, starting from year 3. Using the formula for the present value of an annuity with a delay, we get:

PV = $500[(1 - (1 + 0.08)^-10)/0.08] x (1/1.08)^3 
PV = $3,491.60

Therefore, the amount you would have to deposit today to fund this deferred annuity is approximately $2,900 (rounded to the nearest $100).

A Deferred Annuity Will Pay You $500 at the End