You have earned a pension worth $2,000 a month, you think you will live and additional 15 years. The current prevailing interest rate is 2% per year. 

What is the current market value of your pension?

2.Mega Millions has reached a record-breaking jackpot of $1.6 billion. Whoever holds the winning lottery ticket will be given two options: They can collect their winnings as a one-time lump sum that's less than the value of the total jackpot in this case, it would be $904,900,000, or they can receive the full amount in annual installments stretched out over 29 years. The annuity will pay out 1 billion dollars (meaning the present value of all future cashflows). The current inflation rate is 3%. 

What interest rate would make you indifferent between the annuity and the lump sum payment?

3.You are attempting to price a 25 year annuity due for your insurance company. Payments of $3,500 for this annuity due start at the beginning of each year. The investment team at your company guarantees a return of 8%. 

What is the lowest price your company should offer?

Answer rating: 100% (QA)

1 To calculate the current market value of your pension we can use the formula for present value of ... View the full answer