## Quant's annuity doubt

danish.hassan7
Good Student
Posts: 10
Joined: Sat Apr 22, 2017 11:51 am

### Quant's annuity doubt

If an investor who has a required rate of return of 7% per year pays \$1,000 for a five-year ordinary annuity, the annuity pays ________ per year.
a. \$244 Correct
b. \$271 Incorrect
c. \$263 Incorrect
If the annuity pays C per year, we have 1,000 = C/0.07*(1-1/(1.07^5)) => C = 1,000*0.07/0.287 = 244.

Could you please explain me the meaning of the question. And the how to derive the formula it uses to solve.

My understanding: the annuity pay per year ...does it means the return on investment

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edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: Quant's annuity doubt

Hi Danish,

An ordinary annuity makes a series of equal payments at the end of each period. So, let's calculate it very simply:-

Please plug these numbers into your calculator: PV= -1000, N= 5, I/Y= 7, FV= 0, then CPT= PMT and you will get annual payments = 243.89 i.e close to 244.

danish.hassan7
Good Student
Posts: 10
Joined: Sat Apr 22, 2017 11:51 am

### Re: Quant's annuity doubt

Doubt cleared. Thank you.