Hi guys.. taking intro to Finance right now in school. We are doing a bunch of TVM right now and getting into bonds.. anyway, I have been working on this problem for a while, but haven't been able to solve it. I have drawn a timeline and everything, but I don't get how you solve for annuity's from year 6-11. If any of you could walk me through it or explain how its done, I would reallly appreciate it. This is probably easy for most of you. Here is the problem:
Grandma deposits $2100 into an account earning 6.25% interest, annually. After exactly 6 years, the bank offers her the option of moving the money into an account earning 7.1%, semi-annually, IF she will make identical deposits every period. She does this for 5 years, after which the bank suspends the offer, and Grandma returns the money to an account earning 5.5%, compounded annually. At the end of the 20th year, Grandma has $16,452.81 in the account. How much were her annuity deposits?
I know the answer is 500$.. not sure how to get there.
This is just a ridiculously over complicated question. Totally unnecessary for an undergrad student learning about TVM. Whoever made this up (probably a professor) was probably bored and was trying to justify his salary.
The easier way to think about this question is to ignore the fact that grandma changed accounts. Just think about the change in interest rate. This question is basically a bunch of FV/PV calculations cramped together, so it's not really that complicated. My advice would be to write out the entire equation and go from there. You only have one unknown variable (the annual PMT), so it shouldn't be that hard to isolate that onto one side of the equation.
For future reference: this isn't a site to help you with your homework.
537.80
Can someone tell me how to do this problem using my financial calculator?
Step 1: Find what amount of money she will have after 6 years.
n = 6 i = 6.25 PV = -2,100
You get FV = 3,021.29.
Step 2: Find what amount of money she will have after 11 years. You can back this out from the final amount by get the PV at year 11.
n = 9 i = 5.5 FV = 16,452.81
You should get PV = -10,161.74.
Step 3: Now all you have to do solve for the PMT since you have the values for years 6 and 11. Remember to adjust for semiannual calculations.
n = 10 i = 3.55 PV = -3,021.29 FV = 10,161.74
You should get PMT = -500.
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