OArdinary

11-1
11
11

nnuities

Chapter 11
McGraw-Hill
McGraw-HillRyerson©
Ryerson©
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Learning Objectives
Objectives
11
Learning
After completing this chapter, you will be able to:
Calculate the…
LO-1 … payment size in ordinary and
deferred annuities
LO-2 … number of payments in ordinary
and deferred annuities

LO-3 … interest rate in ordinary annuities

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Usingyour
Using yourfinancial
financialcalculator
calculator

… solve for payment number or

size or interest rate using the
same steps as before …

we need to reorganize the formulae to solve

algebraically
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Finding the Payment Size….

PMT

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11 FindingPayment
Finding PaymentSize
Size
ofofan
an
OrdinarySimple
Ordinary SimpleAnnuity
Annuity
Your life partner somehow convinced you that you can’t
afford the car of your dreams, priced at $28800. You are
advised to… “Save up for 4 years and then buy the car for
cash.” How much would you PMT
have to save each month, if
you could invest with a return of
10% compounded monthly?
You need to decide if this situation involves
… a PV or a FV and then use the appropriate formula...

As you have to save up the $28,800, i.e. in the future,

FV = $28,800
Assume you have no savings … PV = 0

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11 FindingPayment
Finding PaymentSize
Size
ofofan
an
OrdinarySimple
Ordinary SimpleAnnuity
Annuity

Your life
Your life partner
partner
somehow convinced
somehow convinced you you
that you
that you can’t
can’t afford
afford the
the
car of
car of your
your dreams,
dreams, PMT = - 490.44
priced at
priced at $28800.
$28800. (At(At least
least 12
not right
not right now).
now). You
You areare
advised to…
advised to…
“Save up
“Save up for
for 44 10 0
years and
years and then
then buy
buy the
the car
car
for cash.”
for cash.” 28800 48
How much
How much
would you
would you have
have toto save
save
each month,
each month, ifif you
you could
could
invest with
invest with aa return
return ofof
10% compounded
10% compounded
monthly? Formula solution
Formula solution
monthly?
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Which Formula?
Which Formula?
Algebraic Method
Algebraic Method of
of Solving
Solving for PMT
for PMT

PV = PMT [ ] FV
1-(1+ i)-n
i
= PMT [ (1+ i)n - 1
i ]
1. (a) If the payments form a Simple Annuity go directly to 2.
1.
(b) If the payments form a General Annuity, find c and i2
If the annuity’s
2.2. If the annuity’s
PV is FV is known,
known, substitute substitute values
values of PV, n, of FV, n, and i
and i into FV formula.
into PV
McGraw-Hill Ryerson© formula. 3.3. &
& 4.4.
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Which Formula?
Which Formula?
Algebraic Method
Algebraic Method of
of Solving
Solving for
for PMT
PMT

PV = PMT [ ]
1-(1+ i)-n
i
FV = PMT [ (1+ i)n - 1
i
]
3.3. Calculate the quantity within the square brackets.

4.4. Rearrange the equation to solve for PMT.

Applying Method…
Applying Method…
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11 FindingPayment
Finding PaymentSize
Size
ofofan
an
OrdinarySimple
Ordinary SimpleAnnuity
Annuity

Which Formula?
Which Formula?
Your life
Your life partner
partner
somehow convinced
somehow convinced you you 2. 2. As the annuity’s FV is known,
that you
that you can’t
can’t afford
afford thethe therefore, the FV formula is used
car of
car of your
your dreams,
dreams,
priced at
priced at $28800.
$28800. (At(At least
least
not right now). You
not right now). You are
advised to…
advised to…
are FV = PMT [ (1+ i)
i
n
]
-1
“Save up
“Save up for
for 44
years and
years and then
then buy
buy the
the Extract necessary data...
car for
car for cash.”
cash.”
How FV = 28800 PV = 0 n = 4*12 = 48
How
much would
much would you
save each
each month,
you have
month,
have toto i = .10/12 c = 1 PMT = ?
save ifif
you could
you could invest
invest with
with aa
return of
return of 10%
10%
compounded monthly?
compounded
McGraw-Hill Ryerson© monthly?
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Formula FV = PMT
Formula [
(1+ i)n - 1
i ] 11-10

FV = 28800 PV = 0 n = 4*12 = 48
i = .10/12 c = 1 PMT = ?
Your life
Your life partner
partner
somehow convinced
somehow convinced you you
that you
that you can’t
can’t afford
afford thethe 58.7225
0.4894
1.4894
490.44
1.0083
0.0083
car of
car of your
your dreams,
dreams,
priced at
priced at $28800.
$28800. (At(At least
least
not right
not right now).
now). You
You are
are .10 12
advised to…
advised to…
“Save up
“Save up for
for 44
years and
and then
then buy
buy the
the 1 48
years
car for
car for cash.”
cash.”
How
How 1
much would
much would youyou have
have toto
save each
save each month,
month, ifif 28800
you could
you could invest
invest with
with aa
return of
return of 10%
10% …anotherexample
example
compounded monthly?
monthly? …another
compounded
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The
McGraw-Hill Ryerson©
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11 Your parents
Your parents are
are discussing
discussing thethe terms
terms ofof the
the
$100 000
$100 000 mortgage
mortgage that
that they
they have
have offered
offered to to
hold in
hold in the
the purchase
purchase ofof your
your first
first home.
home.
They are
They are considering
considering an an
interest rate
interest rate of
of 5%
5% compounded
compounded monthly.
monthly.
If you
If you were
were to to
take 20
take 20 years
years to
to
repay the
repay the mortgage,
mortgage,
find the
find the size
size of
of the
the
PV = FVmonthly npayment.
= 0 payment.
monthly =12*20 = 240
$100000
PMT = -659.96
12
5 240 100 000
0

McGraw-Hill Ryerson©
Formula solution
Formula solution
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Extract necessary data...

Yourparents
Your parentsare are
discussingthe
discussing theterms
termsofof
the100
the 100000
000mortgage
mortgage PV =
thatthey
that theyhave
haveoffered
offeredtoto
holdininthe
hold thepurchase
purchaseofof i = $100000
.05/12
yourfirst
your firsthome.
home.They They
areconsidering
consideringan an n =12*20 = 240
are
interestrate
interest rateofof5%
5% FV = 0
compoundedmonthly.
compounded monthly.
IfIfyou
youwere
weretototake
take2020 C =1
yearstotorepay
years repaythethe
mortgage,find
mortgage, findthe
thesize
size
ofofthe
themonthly
monthlypayment
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payment ..
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Choose appropriate formula and Solve

2.2. As the annuity’s PV is known, the PV formula is used

Formula
Formula PV = PMT 1-(1+ i)[
-n

i ]
n =12*20 =240 PV = $100000 i = .05/12
Sizeof
Size ofmonthly
monthly
mortgage
mortgage
-0.6314
0.3686
1.0042
0.0042
659.96
0.0015
151.53 payment
payment
.05 12 1
240 1
100 000
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How much interest will you pay your
parents over the 20 year period?

Amount
$
Monthly Payment x Number of Payments
659.96 240 158,390.40
Amount Borrowed 100,000.00

Total Interest Paid 58,390.40

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As this amount
of interest
shocks you, PMT
N = = 217.52
-700
you discuss the
possibility of
making payments 700
of $700/month,
to save some time
218 payments
218 payments == 18
18 yrs
yrs 2months
2months
and interest
costs.

Determine the time

it will take you to Formula solution
Formula solution
repay your
McGraw-Hill Ryerson©
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Formula
Formula n
[
ln 1
PV  i
PMT ] 11-17

ln 1 i
n 0 i = .05/12 PV = $100,000 PMT = $700 C = 1

-0.4048
-0.9045
0.5952
0.0042
1.0042
-217.52
217.52
.05 12 1

100 000

700 1

218 payments
218 payments == 18
18 yrs
yrs 2months
2months
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Formula
Formula n
[
ln 1
PV * i
PMT ] 11-18

ln 1 i

Developing the Formula

1. Base formula PV  PMT [ i ]

1 (1 i)-n

2. To isolate n, divide both

sides by PMT
PV  PMT
PMT PMT
[ i
]
1 (1 i)-n

PV
PMT
 [ 1 (1 i)-n
i ]
…Continue…
…Continue…
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…from 2. PV 
PMT [ ]
1 (1 i)-n
i
3. Continue to isolate n.

(a) Multiply both sides by i

PMT [
PV*i  1 (1 i) -n *i
i ]
PV *i  1 (1 i) -n
PMT
 -n  1  PV*i
(b) Reorganize equation (1 i)
PMT

[
(c) Now Take the natural logarithm -n* ln (1 i)  ln 1  PV*i
(ln or lnx) of both sides PMT ]
(d) Solving for n…
divide both sides by n
ln[[1
-n* ln(1 i)  ln 1 PV
 PV**
PMT
PMT
i i]

ln(1+i) ln(1+i) ln ln(1+i)

1  i
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Approximately how much money do you save
in interest charges by paying $700/month,
rather than $659.91/month?

Amount
$
Monthly Payment x Number of Payments
659.96 240 158,390.4
0
700.00 217.52 152,264.00
Total Interest Saved 6,126.40

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If you could
see your way to a
further increase PMT
N = = 205.62
-725
of $25/month,
(a) how much
faster would you 725
pay off the
mortgage, and
(b) approximately Paying $725
Paying $725
how much less 206 payments
206 payments == 17
17 yrs
yrs
interest would be 2months
2months
involved?
Formula solution
Formula solution
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Formula
Formula n
[
ln 1
PV * i
PMT ] 11-22

ln 1 i
n 0 i = .05/12 PV = $100,000 PMT = $725 C = 1

-205.52
-0.8550
-0.4253
0.0042
1.0042
205.52
0.5747
.05 12 1
100 000

725 1

206 payments
206 payments == 17
17 yrs
yrs 2months
2months
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Amount
$
Monthly Payment x Number of Payments
700.00 217.52 or 218 152,264.00
725.00 205.62 or 206 149,074.50
(a) Payments Saved 12
(b)Total Interest Saved 3,189.50

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FindingPayment
Finding PaymentSize
Size 11-25
11
ininaa

DeferredAnnuity
Deferred Annuity
York Furniture has a promotion on a bedroom set
selling for $2250. Buyers will pay
“no money down and no payments for 12 months.”
The first of 24 equal monthly payments is
DEFERRAL
due 12 months from the purchase date.
PMT What should the monthly payments
be if York Furniture earns 10% compounded monthly on
its account receivable during both the deferral period
and the repayment period?

Since you want the furniture now, this involves a PV

PV = $2250 Once you repay the loan, FV = 0
Payments are deferred for 11 months.
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11 York Furniture
York Furniture hashas aa promotion
promotion on
on aa
bedroom set
bedroom set selling
selling for
for $2250.
$2250. Buyers
Buyers will
will pay
pay
“no money
“no money down
down andand
no payments
no payments forfor 12
12 months.”
months.” The first
The first ofof
24 equal
24 equal monthly
monthly payments
payments isis due
due 12
12 months
months
from the
from the purchase
purchase date.
date.
What should
What should the
the monthly
monthly payments
payments be
be ifif
York Furniture
York Furniture earns
earns 10%
10% compounded
compounded monthly
monthly
on its
on its account
account receivable
receivable during
during both
both
the deferral
the deferral period
period and
and the
the repayment
repayment period?
period?
In effect,
In effect, York
York furniture
furniture hashas
given aa loan
given loan to
to aa buyer
buyer of
of $2,250
$2,250
on the
on the day
day of
of the
the sale!
sale!

Whenthe
When thepayments
paymentsbegin,
begin,the
thebuyer
buyerowes $2,250
owes$2,250

plus accrued
plus accruedinterest!
interest!

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0 11 12 13 35 36 Months
$2250 PMT PMT PMT Payments

n = 24 PV of
PV of the
the payments
payments at
at
the end
the end of
of month
month 11
11
PVAnnuity
d = 11 =
i = 0.10/12 FV of
FV of the
the $2,250
$2,250 loan
loan
$2250 FV at the
at the
end of
end of month
month 11
11

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FindingPayment
Finding PaymentSize
Size 11-28
11
ininaa

DeferredAnnuity
Deferred Annuity
York Furniture
York Furniture Find the amount owed
after 11 months:
has aa promotion
has promotion
on aa bedroom
on bedroom set set selling
selling
for $2250.
for $2250. Buyers
Buyers will will pay
pay
“no money
“no money down
down and and nono FV = 2,465.06
payments for
payments for 12
12 months.”
months.”
The first
The first ofof 24
24
equal monthly
equal monthly payments
payments isis 12 10 0
due 12
due 12 months
months from from thethe
purchase date.
purchase date. What
What
should the
should the monthly
monthly 11 2250
payments be
payments be ifif York
York
Furniture earns
Furniture earns 10% 10%
compounded monthly
compounded monthly on on
its account
its account receivable
receivable
during both
during both the
the deferral
deferral $2,465.06 is
is the
the PV
PV of
of the
the annuity
annuity
period andand $2,465.06
period
the repayment
the repayment period?
McGraw-Hill Ryerson©
period?
 11
FindingPayment
Finding PaymentSize
Size 11-29
11
ininaa

DeferredAnnuity
Deferred Annuity
York Furniture
York Furniture
has aa promotion
has promotion Now find the PMT of the annuity …
on aa bedroom
on bedroom set set selling
selling
for $2250.
for $2250. Buyers
Buyers will will pay
pay
“no money
“no money down
down and and nono
payments for
payments for 12
12 months.”
months.” FV = =
PMT
PV 113.75
- 2,465.06
2,465.06
The first
The first ofof 24
24
equal monthly
equal monthly payments
payments isis 2465.06
due 12
due 12 months
months from from thethe
purchase date.
purchase date. What
What 24 0
should the
should the monthly
monthly
payments be
payments be ifif York
York
Furniture earns
Furniture earns 10% 10%
compounded monthly
compounded monthly on on 24monthly
24 monthlypayments
paymentsof of$113.75
$113.75
its account
its account receivable
receivable willrepay
will repaythe
theloan.
loan.
during both
during both the
the deferral
deferral
period and
period and
the repayment
repayment period?
period? Formulasolution
Formula solution
the
McGraw-Hill Ryerson©
 11
FindingPayment
Finding PaymentSize
Size 11-30
11
ininaa

DeferredAnnuity
Deferred Annuity
York Furniture
York Furniture Find the amount owed
after 11 months:
has aa promotion
has promotion
on aa bedroom
on bedroom set set selling
selling Formula FV = PV(1 + i)n
Formula
for $2250.
for $2250. Buyers
Buyers will will pay
pay
“no money
“no money down
down and and nono
payments for
payments for 12
12 months.”
months.” FV = 2250(1 + 0.10/12)11
The first
The first ofof 24
24 = $2,465.06
equal monthly
monthly payments
payments isis
[ ]
equal 1 (1 i)-n
due 12
due 12 months
months from from thethe
purchase date.
date. What
What PV  PMT
purchase
should the
the monthly
monthly i
should
payments be
payments be ifif York
York 2465.06 = PMT [1-(1+.10/12)-24]
Furniture earns
Furniture earns 10% 10% .10/12
compounded monthly
compounded monthly on on
its account
its account receivable
receivable PMT = $113.75
during both
during both the
the deferral
deferral 24monthly
monthlypayments
paymentsof of$113.75
$113.75
period and
period and 24
the repayment
repayment period?
period? willrepay
will repaythe
theloan.
loan.
the
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i.e....Number Of Payments

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FindingNumber
Finding NumberOf
OfPayments
Payments
ininaa
Deferred
Deferred
Annuity
Annuity
$20,000 is invested in a fund
earning 8% compounded quarterly.
The first quarterly withdrawal
of $1,000 will
be taken from the fund
DEFERRAL five years
from now. N How many
withdrawals will it take to deplete the
fund?
The FV of $20,000 after the deferral, becomes the
PV of the annuity ...
Payments are deferred for 19 quarters

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PMT = $1000 i = 0. 08/4 = .02

Years
0 4.75 5 6 7 8

$20,000
PV1 d = 19 Payments of $1000/quarter
The $20000 n=?
FV1
earns
interest for This FV1 then becomes the PV of the
4 years 9 annuity of $1000/quarter
months

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FindingNumber
Finding NumberOf
OfPayments
Payments
ininaa
Deferred
Deferred
$20,000isis
$20,000 AnnuityFind the FV of
Annuity
invested
invested
inaafund
fund $20,000 in 4.75 years
in
earning
earning
8%compounded
8% compounded
quarterly.
quarterly. FV = 29,136.22
Thefirst
The first
quarterly
quarterly 4
withdrawal 8 0
withdrawal
of$1000
of $1000will
willbebe 19 20000
takenfrom
taken fromthe
the
fundfive
fund fiveyears
years
fromnow.
from now.
How
How
manywithdrawals
withdrawals $29,136.22 is
$29,136.22 is the
the PV
PV of
of the
the annuity
annuity
many
willitit
will
take to deplete the
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FindingNumber
Finding NumberOf
OfPayments
Payments
ininaa
Deferred
Deferred
$20,000isis
$20,000 Annuity
Annuity
invested
invested
inaafund
in fund Now find the PMT of the annuity …
earning
earning
8%compounded
8% compounded
quarterly.
quarterly.
The first FV== - 29,136.22
N
PV 29136.22
44.1
The first
quarterly
quarterly
withdrawal
withdrawal 29136.22 1000
of$1000
of $1000will
willbebe 0
takenfrom
taken fromthe
the
fundfive
fund fiveyears
years 44.1quarterly
44.1 quarterlypayments
paymentswill
willdeplete
depletethe
the
fromnow.
from now. fund(44full
fund(44 fullpayments
paymentsand
and11partial)
partial)
How
How
manywithdrawals
many withdrawals
willitit
will Formulasolution
Formula solution
take to deplete the
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FindingNumber
Finding NumberOf
OfPayments
Payments
ininaa
Deferred
Deferred
$20,000isis
$20,000 Annuity
Annuity
invested Find the FV of
invested $20,000 in 4.75 years
inaafund
in fund
earning
earning Formula FV = PV(1 + i)n
8%compounded
compounded Formula
8%
quarterly.
quarterly.
Thefirst
first FV = 20000(1 + 0.08/4)19
The
quarterly
quarterly = $29,136.22
withdrawal
[ ]
withdrawal
PV *i
of$1000
$1000will
willbebe ln 1
of PMT
takenfrom
fromthe
the n
ln 1 i
taken
fundfive
fund fiveyears
years
fromnow.
from now.
How
How
manywithdrawals
many withdrawals
ln
[1-
29136.22 *.02
1000 ] = 44.1 payments
or 11 years
willitit
will ln(1.02)
take to deplete the
McGraw-Hill Ryerson©
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When…
number of compoundings per year

number of payments per year

McGraw-Hill Ryerson©
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Since you get paid

every second C/Y=
N = = = 414.74
P/Y
PMT 12
-350
26
Thursday you
decide to pay $350
350
every two weeks 26
to make your
budgeting easier.
Find the new term
of your mortgage if
415 bi-weekly
415 bi-weekly
12 payments or or
the interest charges payments
remain at 5% 15 yrs
15 yrs 11.4
11.4 months
months
compounded
monthly. Formulasolution
solution
Formula
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Step 11 Determine c
Step
number of compoundings per year
Since you get C = number of payments per year
paid every second
Thursday you
decide to pay $350 C= 12 / 26 = .4615
every two weeks
Step 22
Step Use c to determine i2
to make your
budgeting easier. i2 = (1+i)c - 1
Find the new term
of your mortgage i2 = (1+ .05/12) .4615-1
if the interest i2 = 0.0019
charges remain at
5% compounded
monthly. Step 33
Step
McGraw-Hill Ryerson©
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Step 33
Step Use this rate i2 = 0.0019 as the value for

“i” in the appropriate annuity formula

Formula
Formula n
[
ln 1
PV * i
PMT ]
ln 1 i

-0.7828
-0.4571
-414.74
0.5428
1.0019
0.0019
1

100 000 350

1
415 payments
415 payments or
or 15
15 yrs
yrs 11.4
11.4 months
months
McGraw-Hill Ryerson©
 $100,000Twenty-year
$100,000 Twenty-year 11-41
11
11
Mortgage
Mortgage
––Interest
Interest5%
5%per
perannum
annum

Scenario Terms Payment

Payment ## of
of TotalCost
Cost
Scenario Terms Amount Payments Total
Amount Payments
1. Per
month $659.96 240 $158,390.40

2. Per
month $700.00 218 $152,264.00

3. Per $149,074.50
month $725.00 206

4. Every
two $350.00 415 $145,250.00
weeks Best Scenario
McGraw-Hill Ryerson©
 11-42
11
11

N = 40.32
Youare
You arenow
now
consideringdelaying
considering delaying
thepurchase
purchase 26
the 8 350
ofofyour
yourfirst
firsthouse
housetoto
allowfor
allow larger
foraalarger 0 15000
downpayment
down payment. .IfIf
yousave
you save$350
$350per
perpay,
pay, 12
howlong
how longwould
woulditittake
take
totohave
havean anadditional
additional
$15000,ififyou
$15000, youcan
can == FV
FV
earn 8%
earn 8%compounded
compounded
monthlyon
monthly onyour
your
savings?
savings?
New Formula required
New required
McGraw-Hill Ryerson©
 11-43
11
11

Step 11 Determine c
Step
number of compoundings per year
C = number of payments per year
Youare
You arenow
now
consideringdelaying
considering delaying
thepurchase
the purchase C= 12 / 26 = .4615
ofofyour
yourfirst
firsthouse
housetoto
allowfor
allow larger
foraalarger Step 22 Use c to determine i2
downpayment
payment. .IfIf Step
down
yousave
you save$350
$350per
per i2 = (1+i)c - 1
pay,how
pay, howlong
longwould
would
itittake
taketotohave
have
anadditional
additional
i2 = (1+ .08/12) .4615-1
an
$15000,
$15000,
youcancanearn
earn 8%
ifif
8%
i2 = 0.0031
you
compoundedmonthly
compounded monthly
onyour
on your Step 33
Step
savings?
savings?
McGraw-Hill Ryerson©
 11
11
Formula
Formula n
[
ln 1 +
FV * i
PMT ] 11-44

ln 1 i

Youare
You arenow
now 0.1316
1.1316
0.0031
0.1237
1.0031
40.3
consideringdelaying
considering delaying
thepurchase
the purchase
ofofyour
yourfirst
firsthouse
housetoto 1
allowfor
allow larger
foraalarger
downpayment
down payment. .IfIf 15000
yousave
you save$350
$350per
per
pay,how
pay, howlong
longwould
would 350 1
itittake
taketotohave
have
anadditional
an additional
$15000,
$15000, ifif
youcan
you canearn
earn 8%8%
compoundedmonthly
compounded monthly 40.3 bi-weekly
40.3 bi-weekly payments
payments
onyour
on your
savings?
savings?
McGraw-Hill Ryerson©
== approx
approx 1yr
1yr 7months
7months
 11
11
Formula
Formula n
[
ln 1 +
FV * i
PMT ] 11-45

ln 1 i

Developing the Formula

1. Base formula FV  PMT [ (1 i) n  1

i ]
2. To isolate n, divide both
sides by PMT
FV  PMT
PMT PMT
[ (1 i) n  1
i ]
FV
PMT

[ (1 i) n  1
i ]
…continued…
…continued…
McGraw-Hill Ryerson©
 11-46
11
11
…from 2.
FV 
PMT [ i ]
(1 i) n  1

3. Continue to isolate n …
(a) Multiply both sides by i FV*i 
PMT [ i ] *i
(1 i) n  1

FV*i
PMT
 [ ]
(1 i) n  1

(b) Reorganize equation (1 i) n  1  FV*i

PMT
(c) Now Take the natural logarithm
(ln or lnx) of both sides
n ln(1+ i)  ln[ 1 + FV* i
PMT ]
(d) Solving for n…
divide both sides by n
ln(1+i)
[[ 1 +
FV
 ln1 + PMT
n ln(1+ i)ln
FV* i
PMT
*i
ln(1+i)
]
ln(1+i) ln 1  i
McGraw-Hill Ryerson©
 11-47
11
11

Already
Already
entered
entered
N= 37.25
Youalready
You alreadyhave
have
$10000saved
$10000 saved 8 350
foryour
for yourdown
down
payment.IfIfyou you 26
payment. 25000
save$350
save $350per
perpay,
pay,
howlong
long 10000
how
woulditittake
would taketotohave
have
anadditional
additional$15000?
$15000? 12
an
Assume
Assume you
you
canearn
can earn 8%8% 37.5bi-weekly
37.5 bi-weeklypayments
payments
compoundedmonthly
monthly
compounded
onall
allofofyour
yoursavings.
savings.
==approx
approx11yr
yr5months
5months
on
McGraw-Hill Ryerson©
 11-48
11
11

Already
Already
entered
entered
FV = 31430.12
Youalready
You alreadyhavehave
$10000saved
$10000 saved
foryour
yourdowndown 8
for
payment.IfIfyou you 26
payment.
save$350
$350perperpay,
pay, 350
save
forthe
for thenext
next22
years,find
years, findthe
thesize
sizeofof 52
youravailable
your availabledown down 12
10000
payment. Assume
payment. Assume
youcan
you canearn
earn 8% 8%
compoundedmonthly
compounded monthly
onall
on allofofyour
yoursavings.
savings. Formulasolution
Formula solution
McGraw-Hill Ryerson©
 11-49
11
11 Formula Solution
Formula Solution
This is more complicated
to solve when
Youalready
alreadyhavehave using
You algebraic equations!
$10000saved
$10000 saved 3 Steps
foryour
for yourdowndown
payment.IfIfyou you 1.
1. Find the FV of the $10 000 in 2 years
payment.
save$350
save $350perperpay,
pay,
2.
2. Find the FV of the $350 per pay
forthe
for thenext
next22
years,find
years, findthe
thesize
sizeofof
3. Add totals together
3.
youravailable
your availabledown down
payment. Assume
payment. Assume
youcan
you canearn
earn 8% 8% The $10
$10 000
000 continues
continues toto earn
earn
The
compoundedmonthly
compounded monthly interest during
during the
the new
new savings
savings period!
period!
interest
onall
on allofofyour
yoursavings.
savings.
McGraw-Hill Ryerson©
 11-50
11
11 Formula Solution
Formula Solution
1. Formula
Formula FV = PV(1 + i) n 3.
3.
1.

Youalready
alreadyhavehave = 10000(1 + 0.08/12) 24 $
You 11,728.88
$10000savedsaved = $11,728.88
$10000
foryour
for yourdown
payment.IfIfyou
payment.
down
you
2. FV  PMT
2.
(1
[
 i ) n 1
i ]
save$350
save $350perperpay,
pay, i2 = (1+i)c - 1
forthe
for thenext
next22 = (1+ .08/12).4615-1
years,find
years, findthe
thesize
sizeofof = 0.0031
youravailable
your availabledown down
payment. Assume
Assume = 350 [(1+.0031)52 –1]
payment.
youcan
you canearn
earn 8% 8% .0031
compoundedmonthly
compounded monthly = $19701.24 19,701.24
onall
on allofofyour
yoursavings.
savings. Total 31,430.12
McGraw-Hill Ryerson©
 11-51
11
11

McGraw-Hill Ryerson©
 11-52
11
11
AAlife
lifeinsurance
insurancecompany
companyadvertises
advertisesthat
that
$50,000will
$50,000 willpurchase
purchaseaa20-year
20-yearannuity
annuity
paying$341.13
paying $341.13atatthe
theend
endof
ofeach
each
month.
month.
Whatnominal
What nominalrate
rateof
ofreturn
returndoes
doesthe
the
annuityinvestment
annuity investmentearn?
earn?

I/Y =
C/Y 5.541
12
240 341.13
1 50000 0

Theannuity
The annuityearns
earns5.54%
5.54%pa
pa
McGraw-Hill Ryerson©
 11-53
11
11

…to solve for i without

a financial calculator

McGraw-Hill Ryerson©
 11-54
11
11

This completes Chapter 11

McGraw-Hill Ryerson©