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Math Help - Paying In Advance

  1. #1
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    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...

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  2. #2
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    Quote Originally Posted by lil_cookie View Post
    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:

    A(t) = A_0(1+x)^t
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  3. #3
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    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.


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