Assume that you inherited some money. A friend of yours is working as an unpaid
ID: 2652394 • Letter: A
Question
Assume that you inherited some money. A friend of yours is working as an unpaid intern at a
local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1
payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of
Year 4. Your friend says she can get you some of these securities at a cost of $900 each. Your
money is now invested in a bank that pays an 8% nominal (quoted) interest rate but with
quarterly compounding. You regard the securities as being just as safe, and as liquid, as your
bank deposit, so your required effective annual rate of return on the securities is the same as
that on your bank deposit. You must calculate the value of the securities to decide whether
they are a good investment. What is their present value to you?
Explanation / Answer
Effective Annual Interest rate = (1+8%/4)^4 -1
Effective Annual Interest rate = 8.2432%
Present value of securities = pv(rate,nper,pmt,fv)
rate = 8.2432%
nper (no of year) = 4
pmt (annual payment) = 50
fv (maturity value) = 1000
Present value of securities = pv(8.2432%,4,50,1000)
Present value of securities = $ 893.16
Decision : It is not a good investment as it offer at $ 900 whereas your Bank Deposit cost $ 893.16 for same return