Assume that you inherited some money. A friend of yours is working as an unpaid
ID: 2682744 • 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 $1,025 each. Your money is now invested in a bank that pays an 10% 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? Round your answer to the nearest cent.Explanation / Answer
Take help from this Q= 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 some securities which call for five pay-ments, $75 at the end of each of the next 4 years, plus a payment of $1,075 at the end of Year 5. Your friend says she can get you some of these securities at a cost of $960 each. Your money is now invested in a bank that pays an 8 percent 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 se-curities is the same as that on your bank deposit. You must calculate the value of the se-curities to decide whether they are a good investment. What is their present value to you? a. $957.75 b. $888.66 c. $923.44 d. $1,015.25 e. $970.51 ANS)= 0 2% 4 8 12 16 20 | | | | | | | | | | | | | | | | | | | | | PV = ? 0 0 0 75 0 0 0 75 0 0 0 75 0 0 0 75 0 0 0 1,075 Input the cash flows in the cash flow register, input I = 2, and solve for NPV = $970.51. Alternatively, find the equivalent annual interest rate: I=(1+.02)4=0.08243=8.243%. Now use your financial calculator: N = 5, I = 8.243, PMT = 75, FV = 1000, and solve for PV =