MAT 3330: Week 4

Fall 2021

App State

Fall 2021 (App State) MAT 3330: Week 4 1 / 37

 Outline for the Week

Section 1

Outline for the Week

Fall 2021 (App State) MAT 3330: Week 4 2 / 37

 Outline for the Week

By the end of the week:

Annuity Values on Any Date: Deferred Annuity

Annuities with Infinite Payments: Perpetuities
Solving for the Unknown Number of Payments of an Annuity

Fall 2021 (App State) MAT 3330: Week 4 3 / 37

 Annuity Values on Any Date: Deferred Annuity

Section 2

Annuity Values on Any Date: Deferred Annuity

Fall 2021 (App State) MAT 3330: Week 4 4 / 37

 Annuity Values on Any Date: Deferred Annuity

Annuity Values on Any Date: Deferred Annuity

Evaluating annuities thus far has always been done at the beginning of
the term (either on the date of, or one period before the first payment)
or at the end of the term (either on the date of, or one period after the
last payment).

Fall 2021 (App State) MAT 3330: Week 4 5 / 37

 Annuity Values on Any Date: Deferred Annuity

Annuity Values on Any Date: Deferred Annuity

Evaluating annuities thus far has always been done at the beginning of
the term (either on the date of, or one period before the first payment)
or at the end of the term (either on the date of, or one period after the
last payment).
In this section, we shall now consider evaluating the
1 present value of an annuity more than one period before the first
payment date.
2 accumulated value of an annuity more than one period after the last
payment date.
3 current value of an annuity between the first and last payment dates.
We will assume that the evaluation date is always an integral number
of periods from each payment date.

Fall 2021 (App State) MAT 3330: Week 4 5 / 37

 Annuity Values on Any Date: Deferred Annuity

Present values more than one period before the first

payment date
Consider the question of finding the present value of an
annuity-immediate with periodic interest rate i and m + 1 periods
before the first payment date.

Fall 2021 (App State) MAT 3330: Week 4 6 / 37

 Annuity Values on Any Date: Deferred Annuity

Present values more than one period before the first

payment date
Consider the question of finding the present value of an
annuity-immediate with periodic interest rate i and m + 1 periods
before the first payment date.
Figure below shows the time diagram for this case where “?” indicates
the present value to be found.

Fall 2021 (App State) MAT 3330: Week 4 6 / 37

 Annuity Values on Any Date: Deferred Annuity

Present values more than one period before the first

payment date
Consider the question of finding the present value of an
annuity-immediate with periodic interest rate i and m + 1 periods
before the first payment date.
Figure below shows the time diagram for this case where “?” indicates
the present value to be found.

The present value of an n-period annuity-immediate m + 1 periods

before the first payment date (called a deferred annuity since payments
do not begin until some later period) is the present value at time m
discounted for m time periods, that is v m a n .
Fall 2021 (App State) MAT 3330: Week 4 6 / 37
 Annuity Values on Any Date: Deferred Annuity

Present values more than one period before the first

payment date

It is possible to express this answer strictly in terms of annuity values:

m+n m m −v m+n n
a m+n −a m = 1−v i − 1−v
i
=v i
=v m 1−v
i
=v m a n =m |a n

Fall 2021 (App State) MAT 3330: Week 4 7 / 37

 Annuity Values on Any Date: Deferred Annuity

Present values more than one period before the first

payment date

It is possible to express this answer strictly in terms of annuity values:

m+n m m −v m+n n
a m+n −a m = 1−v i − 1−v
i
=v i
=v m 1−v
i
=v m a n =m |a n

In this case of annuity-due, one can easily see that the present value is
given by:

m |ä n = v m ä n = ä m+n − ä m

Fall 2021 (App State) MAT 3330: Week 4 7 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 1

Exactly 3 years from now is the first of four $200 yearly payments for
an annuity-immediate, with an effective 8% rate of interest. Find the
present value of the annuity.

Fall 2021 (App State) MAT 3330: Week 4 8 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 1

Exactly 3 years from now is the first of four $200 yearly payments for
an annuity-immediate, with an effective 8% rate of interest. Find the
present value of the annuity.

Solution.
The answer is 200v 2 a 4 = 200(a 6 − a 2 ) = 200(4.6229 − 1.7833) =
$567.92

Fall 2021 (App State) MAT 3330: Week 4 8 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 2

Calculate the present value of an annuity-due paying annual payments

of 1200 for 12 years with the first payment two years from now. The
annual effective interest rate is 6%.

Fall 2021 (App State) MAT 3330: Week 4 9 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 2

Calculate the present value of an annuity-due paying annual payments

of 1200 for 12 years with the first payment two years from now. The
annual effective interest rate is 6%.

Solution.
The answer is 1200(1.06)−2 ä 12 = 1200(ä 14 − ä 2 ) = 1200(9.8527 −
1.9434) ≈ 9, 491.16

Fall 2021 (App State) MAT 3330: Week 4 9 / 37

 Annuity Values on Any Date: Deferred Annuity

Accumulated values more than 1 period after the last

payment date

Consider the question of finding the accumulated value of an

annuity-immediate with periodic interest rate i and m periods after the
last payment date. Figure below shows the time diagram for this case
where “?” indicates the sought accumulated value.

Fall 2021 (App State) MAT 3330: Week 4 10 / 37

 Annuity Values on Any Date: Deferred Annuity

Accumulated values more than 1 period after the last

payment date

Consider the question of finding the accumulated value of an

annuity-immediate with periodic interest rate i and m periods after the
last payment date. Figure below shows the time diagram for this case
where “?” indicates the sought accumulated value.

The accumulated value of an n-period annuity-immediate m periods

after the last payment date is the accumulated value at time n
accumulated for m time periods, that is, (1 + i)m s n .

Fall 2021 (App State) MAT 3330: Week 4 10 / 37

 Annuity Values on Any Date: Deferred Annuity

Accumulated values more than 1 period after the last

payment date

Notice that
(1+i)m+n −1 m
s m+n − s m = i − (1+i)i −1
(1+i)m+n −(1+i)m n −1
= i = (1 + i)m (1+i)i = (1 + i)m s n

It is also possible to work with annuities-due instead of

annuities-immediate:

(1 + i)m s̈ n = s̈ m+n − s̈ m

Fall 2021 (App State) MAT 3330: Week 4 11 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 3

For four years, an annuity pays $200 at the end of each year with
an effective 8% rate of interest. Find the accumulated value of the
annuity 3 years after the last payment.

Fall 2021 (App State) MAT 3330: Week 4 12 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 3

For four years, an annuity pays $200 at the end of each year with
an effective 8% rate of interest. Find the accumulated value of the
annuity 3 years after the last payment.

Solution.
The answer is 200(1.08)3 s 4 = 200(s 7 −s 3 ) = 200(8.9228−3.2464) =
$1135.28

Fall 2021 (App State) MAT 3330: Week 4 12 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 4

A monthly annuity-due pays 100 per month for 12 months. Calculate

the accumulated value 24 months after the first payment using a
nominal rate of 4% compounded monthly.

Fall 2021 (App State) MAT 3330: Week 4 13 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 4

A monthly annuity-due pays 100 per month for 12 months. Calculate

the accumulated value 24 months after the first payment using a
nominal rate of 4% compounded monthly.

Solution.  12
0.04
The answer is 100 1 + 12 s̈ 12 0.04 = $1, 276.28
12

Fall 2021 (App State) MAT 3330: Week 4 13 / 37

 Annuity Values on Any Date: Deferred Annuity

Current value between the first and last payment date

Next, we consider the question of finding the current value of an

n-period annuity-immediate after the payment at the end of mth
period where 1 ≤ m ≤ n. As shown below:

Fall 2021 (App State) MAT 3330: Week 4 14 / 37

 Annuity Values on Any Date: Deferred Annuity

Current value between the first and last payment date

Next, we consider the question of finding the current value of an

n-period annuity-immediate after the payment at the end of mth
period where 1 ≤ m ≤ n. As shown below:

The current value of an n-period annuity-immediate immediately upon

the mth payment date is the present value at time 0 accumulated for
m time periods which is equal to the accumulated value at time n
discounted for n − m time periods

Fall 2021 (App State) MAT 3330: Week 4 14 / 37

 Annuity Values on Any Date: Deferred Annuity

Current value between the first and last payment date

Then, we have:
(1 + i)m a n = v n−m s n

One has the following formula:

(1 + i)m a n = v n−m s n = s m + a n−m

Fall 2021 (App State) MAT 3330: Week 4 15 / 37

 Annuity Values on Any Date: Deferred Annuity

Current value between the first and last payment date

Then, we have:
(1 + i)m a n = v n−m s n

One has the following formula:

(1 + i)m a n = v n−m s n = s m + a n−m

To see this:
−n
(1 + i)m a n = (1 + i)m · 1−(1+i)
i
m m−n
= (1+i) −(1+i)
i
m m−n
= (1+i)i −1 + 1−(1+i)
i
(1+i)m −1 1−(1+i)−(n−m)
= i + i = s m + a n−m

Fall 2021 (App State) MAT 3330: Week 4 15 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 5

For four years, an annuity pays $200 at the end of each half-year
with an 8% rate of interest convertible semiannually. Find the current
value of the annuity immediately upon the 5th payment (i.e., middle
of year 3).

Fall 2021 (App State) MAT 3330: Week 4 16 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 5

For four years, an annuity pays $200 at the end of each half-year
with an 8% rate of interest convertible semiannually. Find the current
value of the annuity immediately upon the 5th payment (i.e., middle
of year 3).

Solution.
The answer is

200(1.04)5 a 8 0.04 = 200(s 5 0.04 + a 3 0.04 )

= 200(5.4163 + 2.7751) = $1, 638.28.

Fall 2021 (App State) MAT 3330: Week 4 16 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 6

An annuity-immediate pays $1000 every six months for three years.

Calculate the present value of this annuity two months before the
first payment using a nominal interest rate of 12% compounded
semiannually.

Fall 2021 (App State) MAT 3330: Week 4 17 / 37

 Annuity Values on Any Date: Deferred Annuity

Example 6

An annuity-immediate pays $1000 every six months for three years.

Calculate the present value of this annuity two months before the
first payment using a nominal interest rate of 12% compounded
semiannually.

Solution.
The present value at time t = 0 is

1 − (1.06)6
1000a 6 0.06 = 1000 = $4917.32
0.06
1
Let j be the interest rate per 2-month. Then 1 + j = (1 + 0.06) 3 .
The present value two months before the first payment is made is
2
4917.32(1.06) 3 = $5112.10
Fall 2021 (App State) MAT 3330: Week 4 17 / 37
 Annuities with Infinite Payments: Perpetuities

Section 3

Annuities with Infinite Payments: Perpetuities

Fall 2021 (App State) MAT 3330: Week 4 18 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities

A perpetuity is an annuity whose term is infinite, i.e., an annuity whose

payments continue forever with the first payment occurs either
immediately (perpetuity-due) or one period from now
(perpetuity-immediate).
Thus, accumulated values of perpetuities do not exist.

Fall 2021 (App State) MAT 3330: Week 4 19 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities

A perpetuity is an annuity whose term is infinite, i.e., an annuity whose

payments continue forever with the first payment occurs either
immediately (perpetuity-due) or one period from now
(perpetuity-immediate).
Thus, accumulated values of perpetuities do not exist.
Let us determine the present value of a perpetuity-immediate at the
time one period before the first payment, where a payment of 1 is
made at the end of each period. The present value will be denoted by
a ∞ . This is shown below:

Fall 2021 (App State) MAT 3330: Week 4 19 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Immediate

Using the equation of value at time t = 0 we find:

a∞ = v + v2 + · · ·
= infinite geometric progression with v < 1
v v
= 1−v = iv = 1i .

Fall 2021 (App State) MAT 3330: Week 4 20 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Immediate

Using the equation of value at time t = 0 we find:

a∞ = v + v2 + · · ·
= infinite geometric progression with v < 1
v v
= 1−v = iv = 1i .

The verbal interpretation of this formula is as follows: If the periodic

effective rate of interest is i then one can invest a principal of 1i for
one period and obtain a balance of 1 + 1i at the end of the first period.
A payment of $1 is made and the remaining balance of 1i is reinvested
for the next period. This process continues forever.

Fall 2021 (App State) MAT 3330: Week 4 20 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Immediate

Using the equation of value at time t = 0 we find:

a∞ = v + v2 + · · ·
= infinite geometric progression with v < 1
v v
= 1−v = iv = 1i .

The verbal interpretation of this formula is as follows: If the periodic

effective rate of interest is i then one can invest a principal of 1i for
one period and obtain a balance of 1 + 1i at the end of the first period.
A payment of $1 is made and the remaining balance of 1i is reinvested
for the next period. This process continues forever.
1−v n
Now, since a n = i and limn→ v n = 0 for 0 < v < 1, we have :

1
a ∞ = lim =
n→∞ i

Fall 2021 (App State) MAT 3330: Week 4 20 / 37

 Annuities with Infinite Payments: Perpetuities

Example 1

Suppose a company issues a stock that pays a dividend at the end of

each year of $10 indefinitely, and the company’s cost of capital is 6%.
What is the value of the stock at the beginning of the year?

Fall 2021 (App State) MAT 3330: Week 4 21 / 37

 Annuities with Infinite Payments: Perpetuities

Example 1

Suppose a company issues a stock that pays a dividend at the end of

each year of $10 indefinitely, and the company’s cost of capital is 6%.
What is the value of the stock at the beginning of the year?

Solution.
1
The answer is 10a ∞ = 10 0.06 = $166.67

Fall 2021 (App State) MAT 3330: Week 4 21 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Due

Analogously to perpetuity-immediate, we may define a perpetuity-due

to be an infinite sequence of equal payments where each payment is
made at the beginning of the period.
Let ä ∞ denote the present value of a perpetuity-due at the time of
first payment is made. A time diagram describing this case is given is
shown below:

Fall 2021 (App State) MAT 3330: Week 4 22 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Due

Analogously to perpetuity-immediate, we may define a perpetuity-due

to be an infinite sequence of equal payments where each payment is
made at the beginning of the period.
Let ä ∞ denote the present value of a perpetuity-due at the time of
first payment is made. A time diagram describing this case is given is
shown below:

The equation of value at time t = 0 is:

1 1
ä ∞ = 1 + v + v 2 + · · · = = = lim ä n
1−v d n→∞

Fall 2021 (App State) MAT 3330: Week 4 22 / 37

 Annuities with Infinite Payments: Perpetuities

Annuities with Infinite Payments: Perpetuities-Due

This formula can be obtained from finding the present value of a

payment of $1 at the beginning of the first period and an
annuity-immediate.
1 1+i 1
1 + a∞ = 1 + = = = ä ∞
i i d

Fall 2021 (App State) MAT 3330: Week 4 23 / 37

 Annuities with Infinite Payments: Perpetuities

Example 2

What would you be willing to pay for an infinite stream of $37 annual
payments (cash inflows) beginning now if the interest rate is 8% per
annum?

Fall 2021 (App State) MAT 3330: Week 4 24 / 37

 Annuities with Infinite Payments: Perpetuities

Example 2

What would you be willing to pay for an infinite stream of $37 annual
payments (cash inflows) beginning now if the interest rate is 8% per
annum?

Solution.
37
The answer is 37ä ∞ = 0.08(1.08)−1
= $499.50

Fall 2021 (App State) MAT 3330: Week 4 24 / 37

 Annuities with Infinite Payments: Perpetuities

a n as a Function of a ∞

Perpetuities are useful in providing verbal explanations of identities.

For example, the formula:

1 − vn 1 vn
an = = − = a∞ − vna∞
i i i

Fall 2021 (App State) MAT 3330: Week 4 25 / 37

 Annuities with Infinite Payments: Perpetuities

a n as a Function of a ∞

Perpetuities are useful in providing verbal explanations of identities.

For example, the formula:

1 − vn 1 vn
an = = − = a∞ − vna∞
i i i

This can be interpreted as the difference between payments for two

perpetuities each paying 1 at the end of each period; the first payment
of the first perpetuity is one period from now and the first payment of
the second perpetuity is n + 1 periods from now.
1
The present value of the first perpetuity is i and that of the second
perpetuity is v n 1i .

Fall 2021 (App State) MAT 3330: Week 4 25 / 37

 Annuities with Infinite Payments: Perpetuities

Example 3

You can receive one of the following two sets of cash flows. Under
Option A; you will receive $5, 000 at the end of each of the next 10
years. Under Option B; you will receive X at the beginning of each
year, forever. The annual effective rate of interest is 10%. Find the
value of X such that you are indifferent between these two options.

Fall 2021 (App State) MAT 3330: Week 4 26 / 37

 Annuities with Infinite Payments: Perpetuities

Example 3

You can receive one of the following two sets of cash flows. Under
Option A; you will receive $5, 000 at the end of each of the next 10
years. Under Option B; you will receive X at the beginning of each
year, forever. The annual effective rate of interest is 10%. Find the
value of X such that you are indifferent between these two options.

Solution.
The equation of value at time t = 0 is:
 
5000a 10 = Xd = X 1i + 1
30722.84 = 11X
X = $2, 792.99.

Fall 2021 (App State) MAT 3330: Week 4 26 / 37

 Annuities with Infinite Payments: Perpetuities

Deferred Perpetuities

Similar to deferred annuities, one can discuss deferred perpetuities.

The present value P0 of a deferred perpetuity-Immediate with periodic
payment of 1 that starts in n periods time, with a first cash flow at the
beginning of period n + 1; is given by the equation of value at time
t = n.

P0 = (1 + i)−n a ∞

Fall 2021 (App State) MAT 3330: Week 4 27 / 37

 Annuities with Infinite Payments: Perpetuities

Example 4

Fifty dollars is paid at the end of each year forever starting six years
from now. Assume the annual effective rate of interest is 10%, find
the present value of the investment.

Fall 2021 (App State) MAT 3330: Week 4 28 / 37

 Annuities with Infinite Payments: Perpetuities

Example 4

Fifty dollars is paid at the end of each year forever starting six years
from now. Assume the annual effective rate of interest is 10%, find
the present value of the investment.

Solution.
The deferred period is t = 5. The answer is
1
50(1 + i)−5 a ∞ = 50(1.1)−5 · = $310.46
0.1

Fall 2021 (App State) MAT 3330: Week 4 28 / 37

Solving for the Unknown Number of Payments of an Annuity

Section 4

Solving for the Unknown Number of Payments of an

Annuity

Fall 2021 (App State) MAT 3330: Week 4 29 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity

In this section we consider the question of finding the number of

payments n given:
the regular payment R
the interest per period i and
either the present value or the accumulated value of an annuity.

We will assume an annuity-immediate. A similar calculation applies for

annuity-due.

Fall 2021 (App State) MAT 3330: Week 4 30 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity

In this section we consider the question of finding the number of

payments n given:
the regular payment R
the interest per period i and
either the present value or the accumulated value of an annuity.

We will assume an annuity-immediate. A similar calculation applies for

annuity-due.
Let P be the present value of an annuity-immediate. A time diagram is
given below:

Fall 2021 (App State) MAT 3330: Week 4 30 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity
The equation of value at time t = 0 is P = Ra n i , where P ;R; and i
are known quantities and n is the unknown.
Solving the equation for n we find:
ln 1−i( P )
[ ].
1−v n

R
P =Ra n i =R i
=⇒ v n =1−i( P
R)
=⇒ n= ln v

Fall 2021 (App State) MAT 3330: Week 4 31 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity
The equation of value at time t = 0 is P = Ra n i , where P ;R; and i
are known quantities and n is the unknown.
Solving the equation for n we find:
ln 1−i( P )
[ ].
1−v n

R
P =Ra n i =R i
=⇒ v n =1−i( P
R)
=⇒ n= ln v

Note: The last expression is not necessary a positive integer.

Thus, the equation P = Ra n i is replaced by P = Ra n+k i where n is a
positive integer and 0 < k < 1.

Fall 2021 (App State) MAT 3330: Week 4 31 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity
The equation of value at time t = 0 is P = Ra n i , where P ;R; and i
are known quantities and n is the unknown.
Solving the equation for n we find:
ln 1−i( P )
[ ].
1−v n

R
P =Ra n i =R i
=⇒ v n =1−i( P
R)
=⇒ n= ln v

Note: The last expression is not necessary a positive integer.

Thus, the equation P = Ra n i is replaced by P = Ra n+k i where n is a
positive integer and 0 < k < 1.
In this case:
 
1−v n+k
P =Ra n+k i =R i
=⇒ v n+k =1−i( P
R)

Fall 2021 (App State) MAT 3330: Week 4 31 / 37

Solving for the Unknown Number of Payments of an Annuity

Solving for the Unknown Number of Payments of an

Annuity
Then we have: h i
ln 1 − i( PR )
n+k =
ln v
It follows that, for the annuity to have the present value P , n regular
payments of R must be made and an additional one payment in the
amount of " #
(1 + i)k − 1
R
i

to be made at time t = n + k; that is, at the fractional period k of the

(n + 1)th period.
When the last smaller payment is made at the same time as the last
regular payment, this is called a balloon payment otherwise it is called
drop payment.
Fall 2021 (App State) MAT 3330: Week 4 32 / 37
Solving for the Unknown Number of Payments of an Annuity

Example 1

An investment of $80, 000 is to be used to make payments of $5000

at the end of every six months for as long as possible. If the fund
earns a nominal interest rate of 12% compounded semiannually, find
how many regular payments can be made and find the amount of the
smaller payment:
(a) to be paid along the last regular payment,
(b) to be paid six months after the last regular payment,
(c) to be paid during the six months following the last regular
payment.

Fall 2021 (App State) MAT 3330: Week 4 33 / 37

Solving for the Unknown Number of Payments of an Annuity

Example 1

Solution.
We first solve the equation 8000 = 5000a n+k 0.06 as follows:
" #
1 − (1.06)−(n+k)
8000 = 5000a n+k 0.06 = 5000
i

80000
=⇒ 1 − (1.06)−(n+k) = (0.06) = 0.96.
5000
from which we find:
ln 0.04
1 − 0.96 = 0.04 = (1.06)−(n+k) =⇒ n + k = − = 55.242
ln 1.06
Thus, n = 55 and k = 0.242:

Fall 2021 (App State) MAT 3330: Week 4 34 / 37

Solving for the Unknown Number of Payments of an Annuity

Example 1

Solution.
(a) Let X be the amount of the smaller payment to be be made at
the end of the 55th period. A time diagram of this situation is given
below:

Note that every period on the time diagram consists of six months.
The equation of value at time t = 0 is:

80000 = 5000a 55 0.06 + X(1.06)−55

=⇒ 80000 = 79952.715 + (0.0405674)X =⇒ X = $1165.59
Thus, in this case, we have 54 payments of $5000 each, and a last
payment of 5000 + 1165.59 = 6165.59.

Fall 2021 (App State) MAT 3330: Week 4 35 / 37

Solving for the Unknown Number of Payments of an Annuity

Example 1

Solution.
(b) This situation is illustrated below:

The equation of value at time t = 0 is:

80000 = 5000a 55 0.06 + Y (1.06)−56

=⇒ 80000 = 79952.715 + (0.0382712)Y =⇒ Y = $1235.53
In this case, we have 55 payments of $5000 each and a last payment
of $1235.53 six months after the last regular payment.

Fall 2021 (App State) MAT 3330: Week 4 36 / 37

Solving for the Unknown Number of Payments of an Annuity

Example 1

Solution.
(c) In this case we have 55 payments of $5000 each and one last
payment of
" #
(1.06)0.242 − 1
5000 = $1182.13
0.06
365
to be made 44 days (0.242 × 2 = 44.165) after the last regular
payment.

Fall 2021 (App State) MAT 3330: Week 4 37 / 37

Solving for the Unknown Number of Payments of an Annuity

Example 1

Solution.
(c) In this case we have 55 payments of $5000 each and one last
payment of
" #
(1.06)0.242 − 1
5000 = $1182.13
0.06
365
to be made 44 days (0.242 × 2 = 44.165) after the last regular
payment.

A similar type of calculation can be done for this example with known
accumulated value instead of present value.

Fall 2021 (App State) MAT 3330: Week 4 37 / 37