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20 February, 17:14

Rebecca would like to set up an account to supplement her parents' retirement income for the next 15 years.

a. If t he account earns 7.2 percent compounded monthly, how much will Rebecca have to deposit today so that her parents are paid $150 at the end o f each month?

b. How much would she have to deposit if her parents wanted to receive the $150 payment at t he beginning o f each month?

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  1. 20 February, 19:42
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    a.)

    This is an annuity type of question. Using a financial calculator, input the following to find the PV of the Ordinary annuity;

    Total duration; N = 15*12 = 300

    Monthly rate; I/Y = 7.2%/12 = 0.6%

    One-time future cashflow; FV = 0

    Recurring monthly payment; PMT = 150

    then compute present value; CPT PV = $20,845.24

    b.) This is an Annuity Due type of question since the recurring monthly payment occur at the beginning of the month.

    Using a financial calculator, change the mode to "BEG" and input the following to find the PV of the annuity due;

    Total duration; N = 15*12 = 300

    Monthly rate; I/Y = 7.2%/12 = 0.6%

    One-time future cashflow; FV = 0

    Recurring monthly payment; PMT = 150

    then compute present value; CPT PV = $20,970.31
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