PV of annuities at high discount rates Interest rates in developed countries are mostly in single digits, but double-digit rates are common in developing countries. In October 2012, for example, interest rates on 5-year government bonds were about 14.5% in Egypt and 16% in Nigeria. If you skip ahead to Fig. 27-4, you will see that high inflation pushed the short-term interest rate in the Ukraine up to 16%. Thus it’s useful to see how much PVs fall when interest rates climb from, say, 5% to 15%.
Calculate the PVs of the following cash-flow streams at these two interest rates. a. A 10-year annuity of $ 100 per year. b. A 10-year annuity due of $ 100 per year (first cash flow arrives immediately). How does the switch from a standard annuity to an annuity due increase PV if the interest rate is 15% instead of 5%? c. A 20-year annuity starting at $ 100 per year but growing at 5% per year. d. A 20-year annuity starting at $ 100 per year but declining at 5% per year. Solution needed in excel.