Ann Chen receives an annuity of $450, payable once every two years. The annuity stretches out over 20 years. The first payment occurs at Year 2—that is, two years from today. The annual discount rate is 6 percent.

The trick is to determine the discount rate over a two-year period. The discount rate over two years is:

That is, $100 invested over two years will yield $112.36.

What we want is the present value of a $450 annuity over 10 periods, with a discount rate of 12.36 percent per period:

Transcribed Image Text:

1.06² 1.1236, or 12.36% -