Each year a company is required to place money into a bank account to retire its bond's principal at maturity. If the bond's principal is $10 million, and bank interest is estimated at 8%, how much are the annual payments if they are to be made over the last 20 years of the bond's life?
A)$101,853
B)$218,522
C)$462,950
D)$425,387

Question

Quizplus · Accepted Answer

The annual payments can be calculated using the formula for the present value of an annuity because the company is making equal annual payments to accumulate a future sum. The formula is: $PMT = \frac{FV}{\frac{1-(1+r)^{-n}}{r}}$, where PMT is the annual payment, FV is the future value ($10 million), r is the annual interest rate (8% or 0.08), and n is the number of payments (20 years). Plugging in the values: $PMT = \frac{10,000,000}{\frac{1-(1+0.08)^{-20}}{0.08}}$, which calculates to approximately $218,522.

Each Year a Company Is Required to Place Money into a Bank