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Unformatted text preview: Now, calculate the value of the first security as follows: N = 10 2 = 20; I = 10.2107/2 = 5.1054; PMT = 500; FV = 0; and then solve for PV = -$6,175.82. Note that 10% compounded monthly is really 10.47%. 10.21% compounded semi annually is also really 10.47%. This is the only way that you can compare rates with different compounding periods. Note also that you cant take a short cut you cant say, well lets just calculate 10% compounded semi annually (which is (1.05) 2 1 = 10.25%. While this is close to 10.21%, using 10.25% s the discount rate will not give you the correct answer; it will just give you an approximately correct answer....
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- Spring '08