Calculating Present Value of Annuities

The video tutorial covers the concept of the present value of an annuity, explaining it as a lump sum that can be deposited at the beginning of an annuity's term to yield the same amount as regular payments. It uses examples, such as Tom and Betty's college fund, to illustrate how to calculate the present value. The tutorial also demonstrates finding the present value for an ordinary annuity with monthly payments over 25 years, emphasizing the importance of using parentheses in calculations.

What does the present value of an annuity represent?

• Lump sum equivalent to a series of future payments

• Initial investment needed for an annuity

• Total interest earned over the annuity's term

• Future value of regular payments

How often did Tom and Betty save for their child's education?

• Every two weeks

• Every year

• Every week

• Every month

What was the interest rate used in Tom and Betty's calculation?

• 9.5%

• 9.25%

• 10%

• 8.5%

What is the formula to find the present value of an annuity?

• P = Payment * (1 + i)^n

• P = Payment / (1 + i)^n

• P = Payment * (1 + i)^n - 1 / i

• P = Payment * (1 + i)^n - 1 / i

Why might someone prefer regular payments over a lump sum?

• Regular payments require less initial capital

• Lump sums yield higher returns

• Regular payments are more complex

• Lump sums are easier to manage

What is the monthly payment in the new annuity example?

• $300

• $200

• $400

• $100

What is the interest rate in the new annuity example?

• 11%

• 9.5%

• 10%

• 10.5%

Over how many years is the new annuity planned?

• 15 years

• 30 years

• 25 years

• 20 years

How many total payments are made in the new annuity example?

• 250

• 300

• 350

• 400

What is the lump sum needed instead of making 200 monthly payments in the new example?

• $21,182.36

• $20,000.00

• $22,500.00

• $19,750.00