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I am having trouble understanding how to solve the basic problem of calculating $i$ given an annuity.

For example, say we have that $a_{20}=13.35$.

i.e ,

$$\frac{1-(1+i)^{-20}}{i}=13.35$$

Using Wolfram Alpha we can see that $i \simeq 0.042$

But I am interested in solving for $i$ using a financial calculator ( such as TI BAII plus).

How can this be done?

Clearly $N=20$, payment could be $\mathrm {PMT}= -1$ , and $\mathrm{PV}=13.35$? Or should it be considered negative in the context of you would pay $13.35$ for a fund that pays out a dollar a year for $20$ years, (then $\mathrm{PMT}=1$). In that case we are still missing $\mathrm{FV}$?

user190080
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1 Answers1

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If you have a look to my answer to this question, you will see a "rather simple" approximation.

Using your numbers, my notations and whole numbers $$a=\frac {100}{1335}=\frac {20}{267}\qquad \text{and}\qquad n=20 \implies y=\frac{38}{801}$$ Computing the coefficients $$c_1=-\frac{59917}{6}\qquad c_2=-\frac{2203844}{21}\qquad c_3=-\frac{189356849}{945}$$ $$d_1=-9983\qquad d_2=-\frac{34418015}{252}\qquad d_3=-\frac{393776177}{945}$$

Using the formula, you get $$i=\frac{6739162539251212}{160365841116253677}\approx 0.04202368$$ while the "exact" solution would be $$i\approx 0.04202375$$

This could easily be implemented in any programmable calculator.

Edit

From a programming point of view, it could be more convenient to rewrite my previous formulae as $$r=y\,\frac{\sum_{k=0}^3 c_k\, y^k }{\sum_{k=0}^3 d_k\, y^k }\qquad \text{where}\qquad y=\frac{2 (a n-1)}{n+1} $$ with $$\left( \begin{array}{cc} \color{red} {k} & \color{red} {c_k} \\ 0 & 15120 \left(n^2-20 n+1\right) \\ 1 & -1260 (n+2) \left(8 n^2+113 n-13\right) \\ 2 & -90 \left(90 n^4+355 n^3+942 n^2+705 n-148\right) \\ 3 & -4 (n+2) \left(194 n^4+388 n^3+687 n^2+493 n-142\right) \end{array} \right)$$ $$\left( \begin{array}{cc} \color{red} {k} & \color{red} {d_k} \\ 0 & 15120 \left(n^2-20 n+1\right) \\ 1 & -3780 \left(2 n^3+57 n^2+57 n-8\right) \\ 2 & -60 \left(170 n^4+823 n^3+1560 n^2+508 n-145\right) \\ 3 & -(2 n+1) \left(874 n^4+1559 n^3+3336 n^2+1139 n-428\right) \end{array} \right)$$