I have absolutely no idea what I am doing. I study with OTEN (I work from home), so asking a teacher becomes a problem.
Here's the question:
A relative wills you an annuity paying $7400 per half-year for the next 10 years. If this money can earn 6.5% pa compounded half-yearly, what is the present value of this annuity?
I've been through numerous answers, but when I re-work through the answer it does not seem to add up. They seem to be unreasonably too high or too low. Right now, this is what I come up with:
r=0.065 / 2 = 0.033
N=M(1+r)^n-1 / r(1+r)^n
N=7400 (1+0.033)^20 – 1 / 0.033(1+0.033)^20
=7400(1.033^20-1) / (0.033x1.033^20)
That's based off similar example questions. That seems incredibly wrong. The previous way I did it, I skipped the second last line, and the answer seemed too high - this one seems too low!
Like I said, I'm basing all that on example questions. So I don't know why it looks so wrong.
Can you tell me what I'm doing wrong, and give me the right way to do it.