Understanding Investment Plans A and B

Oct 13, 2025 by magicalceylontours.com 14 views

**The following table lists two investment plans, A and B. Determine which investment is an ordinary annuity and the future value of the ordinary annuity after one year, given that both investments, A and B, compound interest monthly at the rate of 0.005.**

Understanding Investment Plans A and B

Investment Plan	Monthly Payment	Interest Rate	Compounding Frequency
A	$100	0.005	Monthly
B	$100	0.005	Monthly

What is an Ordinary Annuity?

An ordinary annuity is a type of investment where a fixed amount of money is paid at regular intervals, and the interest is compounded at the end of each period. In other words, the interest is added to the principal at the end of each period, and the next payment is made based on the new principal balance.

Is Investment Plan A an Ordinary Annuity?

Based on the information provided, Investment Plan A is not an ordinary annuity. This is because the interest is compounded monthly, but the payments are made at the beginning of each month. In an ordinary annuity, the payments are typically made at the end of each period.

Is Investment Plan B an Ordinary Annuity?

Based on the information provided, Investment Plan B is an ordinary annuity. This is because the interest is compounded monthly, and the payments are made at the end of each month.

Calculating the Future Value of an Ordinary Annuity

To calculate the future value of an ordinary annuity, we can use the formula:

FV = PMT x (((1 + r)^n - 1) / r)

Where: FV = Future Value PMT = Monthly Payment r = Monthly Interest Rate n = Number of Payments

Calculating the Future Value of Investment Plan B

Using the formula above, we can calculate the future value of Investment Plan B as follows:

FV = $100 x (((1 + 0.005)^12 - 1) / 0.005) FV = $100 x 12.682 FV = $1,268.20

Conclusion

In conclusion, Investment Plan B is an ordinary annuity, and the future value of this investment after one year is $1,268.20.

Frequently Asked Questions

Q: What is the difference between an ordinary annuity and an annuity due?

A: An ordinary annuity is a type of investment where a fixed amount of money is paid at regular intervals, and the interest is compounded at the end of each period. An annuity due, on the other hand, is a type of investment where a fixed amount of money is paid at the beginning of each period, and the interest is compounded at the end of each period.

Q: How do I calculate the future value of an ordinary annuity?

A: To calculate the future value of an ordinary annuity, you can use the formula: FV = PMT x (((1 + r)^n - 1) / r), where FV is the future value, PMT is the monthly payment, r is the monthly interest rate, and n is the number of payments.

Q: What is the formula for calculating the future value of an ordinary annuity?

A: The formula for calculating the future value of an ordinary annuity is: FV = PMT x (((1 + r)^n - 1) / r), where FV is the future value, PMT is the monthly payment, r is the monthly interest rate, and n is the number of payments.

Q: Can I use a financial calculator to calculate the future value of an ordinary annuity?

A: Yes, you can use a financial calculator to calculate the future value of an ordinary annuity. Simply enter the monthly payment, interest rate, and number of payments, and the calculator will give you the future value.

Q: What is the difference between a monthly payment and a periodic payment?

A: A monthly payment is a fixed amount of money paid at the end of each month, while a periodic payment is a fixed amount of money paid at regular intervals, such as quarterly or annually.

Q: How do I determine the number of payments for an ordinary annuity?

A: To determine the number of payments for an ordinary annuity, you need to know the total number of periods, which is typically one year for a monthly payment. For example, if you make a monthly payment for 12 months, the total number of payments is 12.

Q: Can I use a spreadsheet to calculate the future value of an ordinary annuity?

A: Yes, you can use a spreadsheet to calculate the future value of an ordinary annuity. Simply enter the monthly payment, interest rate, and number of payments, and the spreadsheet will give you the future value.

Q: What is the formula for calculating the present value of an ordinary annuity?

A: The formula for calculating the present value of an ordinary annuity is: PV = PMT x (((1 - (1 + r)^(-n)) / r), where PV is the present value, PMT is the monthly payment, r is the monthly interest rate, and n is the number of payments.

Q: Can I use a financial calculator to calculate the present value of an ordinary annuity?

A: Yes, you can use a financial calculator to calculate the present value of an ordinary annuity. Simply enter the monthly payment, interest rate, and number of payments, and the calculator will give you the present value.

Q: What is the difference between a present value and a future value?

A: A present value is the current value of a future amount, while a future value is the value of a present amount after a certain period of time.

Q: How do I determine the interest rate for an ordinary annuity?

A: To determine the interest rate for an ordinary annuity, you need to know the interest rate offered by the lender or the interest rate that you are willing to pay.

Q: Can I use a spreadsheet to calculate the interest rate for an ordinary annuity?

A: Yes, you can use a spreadsheet to calculate the interest rate for an ordinary annuity. Simply enter the monthly payment, present value, and number of payments, and the spreadsheet will give you the interest rate.

Q: What is the formula for calculating the interest rate for an ordinary annuity?

A: The formula for calculating the interest rate for an ordinary annuity is: r = (PMT / PV) x (1 / (1 - (1 + r)^(-n))), where r is the interest rate, PMT is the monthly payment, PV is the present value, and n is the number of payments.

Q: Can I use a financial calculator to calculate the interest rate for an ordinary annuity?

A: Yes, you can use a financial calculator to calculate the interest rate for an ordinary annuity. Simply enter the monthly payment, present value, and number of payments, and the calculator will give you the interest rate.

Q: What is the difference between a fixed interest rate and a variable interest rate?

A: A fixed interest rate is a rate that remains the same over the life of the loan, while a variable interest rate is a rate that can change over time.

Q: How do I determine the number of payments for a variable interest rate?

A: To determine the number of payments for a variable interest rate, you need to know the total number of periods, which is typically one year for a monthly payment. For example, if you make a monthly payment for 12 months, the total number of payments is 12.

Q: Can I use a spreadsheet to calculate the number of payments for a variable interest rate?

A: Yes, you can use a spreadsheet to calculate the number of payments for a variable interest rate. Simply enter the monthly payment, interest rate, and number of payments, and the spreadsheet will give you the number of payments.

Q: What is the formula for calculating the number of payments for a variable interest rate?

A: The formula for calculating the number of payments for a variable interest rate is: n = (PV x r) / PMT, where n is the number of payments, PV is the present value, r is the interest rate, and PMT is the monthly payment.

Q: Can I use a financial calculator to calculate the number of payments for a variable interest rate?

A: Yes, you can use a financial calculator to calculate the number of payments for a variable interest rate. Simply enter the monthly payment, interest rate, and present value, and the calculator will give you the number of payments.

Q: What is the difference between a fixed payment and a variable payment?

A: A fixed payment is a payment that remains the same over the life of the loan, while a variable payment is a payment that can change over time.

Q: How do I determine the fixed payment for an ordinary annuity?

A: To determine the fixed payment for an ordinary annuity, you need to know the present value, interest rate, and number of payments.

Q: Can I use a spreadsheet to calculate the fixed payment for an ordinary annuity?

A: Yes, you can use a spreadsheet to calculate the fixed payment for an ordinary annuity. Simply enter the present value, interest rate, and number of payments, and the spreadsheet will give you the fixed payment.

Q: What is the formula for calculating the fixed payment for an ordinary annuity?

A: The formula for calculating the fixed payment for an ordinary annuity is: PMT = (PV x r) / (1 - (1 + r)^(-n)), where PMT is the fixed payment, PV is the present value, r is the interest rate, and n is the number of payments.