I’m doing a problem where i’m calc’ing how much i should be willing to pay now (present value) for an annuity that has an interest payment (discount) of varying amounts. The high the i goes, calcs telll me the less I should give in money right now.
If its got a higher interest rate wouldn’t it be worth more in the future, so why would I pay less?
Why The Higher The Interest On Annuity, Lower Present Value?
25
Oct
Virtuous
October 25, 2009 at 4:27 pm
check the very fine print. Some of that “interest” is really return of principle.
gosh137
October 25, 2009 at 4:39 pm
Good question. As your interest goes up, you accept more risk so you gain a higher reward. Your principal shrinks because you put the money in up front so your reward is gained immediately by smaller capital requirements.