Thread: Paying In Advance

The premiums on an insurance policy are $60 every 3 months, payable at the beginning of each three-month period. If the policy holder wishes to pay 1 year’s premiums in advance, how much should be paid provided that the interest rate is 4.3% compounded quarterly?

What formula would I use for this? The Present value annutiy formula is what i believe it should be...

Originally Posted by lil_cookie

The premiums on an insurance policy are $60 every 3 months, payable at the beginning of each three-month period. If the policy holder wishes to pay 1 year’s premiums in advance, how much should be paid provided that the interest rate is 4.3% compounded quarterly?

What formula would I use for this? The Present value annutiy formula is what i believe it should be...

The question is worded poorly, normally you'd expect premium payments to stay stable so it would be $240. However, if you mean the premiums go up 4.3% a quarter then use the compound interest formula:

Look at it this way to "unconfuse(!)" yourself:
assume that the insured left $180 at beginning (after paying 1st $60)
in an account that pays 4.3% compounded quarterly?

He then withdraws 60 every 3 months to pay next 3 quarterly premiums.
Calculate the interest he will receive in that account.

That interest is the amount by which the $240 would be reduced.