• Assume you are able to purchase a financial instrument (an annuity) that will pay you $400 on the first day of each month for the next five years. Ignoring any problems of collectability and assuming 7.21% annually (7.21% / 12 monthly) is a proper discount rate, how much should you pay for this financial instrument if you want to purchase it?
• Using the financial instrument above again, if the discount rate changes to 9.50% annually, what is the new purchase price?
• An owner of a building wishes to sell his rights to a stream of rental payments due on the first day of each month for the next two years. The monthly payments total $5,000 and the correct annual discount rate is 4.75% (4.75% / 12 per month). How much should the building owner be able to charge for the stream of payments (i.e. for the annuity)?