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Financial Mathematics Old FM Forum 

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#1




FM Problem Help
Hi again!
I am having trouble with the following problem: At time t=0, Paul deposits P into a fund crediting interest at an effective annual interest rate of 8%. At the end of each year in years 6 through 20, Paul withdraws an amount sufficient to purchase an annuitydue of 100 per month for 10 years at a nominal interest rate of 12% compounded monthly. Immediately after the withdrawl at the end of year 20, the fund value is zero. Calculate P. The solution states: a doubledot angle 120 at .01 multiplied by 100 = $7,039.75 I get everything except for the "multiplied by 100" part. The problem says "100 per month" Originally, I converted the 100 to per year: 100 x 12 = 1200. Why did they multiply 100 instead of 1200? Why didn't they change it to "per year" since we have to convert nominal interest rate to annual interest rate? 
#2




Quote:
You say “we have to convert nominal interest rate to annual interest rate”, but you don’t need an annual interest rate. They used 1% per month, which is fine. There are often multiple valid ways to do an FM problem. 
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