+598 If the prevailing market interest rate increases, does the purchase price of an annuity decrease or increase?
any help would be great, thanks
+2498 i think increase is the answer because if interest will be incresed there will come more people than before and they will recieve more money ( if i understood the quetion right :D )
NO!. An annuity with fixed patments, its PV or purchase price would DECREASE with increase in interest rates: Example: $100,000 annuity at 4% interest that would pay you fixed annual payment of $7,358.18 for 20 years. If interest rates went up to 5% and the payments remained exactly the same for 20 years, the PV or the purchase price would be: $91,699.12.
