lecture_chap05_06A

# You currently have 5000 to invest what interest rate

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 00 (you receive 1200 in 5 years) CPT I/Y = 3.714% Discount Rate – Example 2 • Suppose you are offered an investment that will allow you to double your money in 6 years. You have \$10,000 to invest. What is the implied rate of interest? • Formula Approach • r = (20,000 / 10,000)1/6 – 1 = .122462 = 12.25% • Calculator Approach • • • • N=6 PV = -10,000 FV = 20,000 CPT I/Y = 12.25% Discount Rate – Example 3 • Suppose you have a 1-year old son and you want to provide \$75,000 in 17 years towards his college education. You currently have \$5000 to invest. What interest rate must you earn to have the \$75,000 when you need it? • Formula Approach • r = (75,000 / 5,000)1/17 – 1 = .172688 = 17.27% • Calculator Approach • N = 17 • PV = -5000 • FV = 75,000 • CPT I/Y = 17.27% Workshop #3 • Consider two alternatives with equal risk: a) You can invest \$500 today and receive \$600 in 5 years. b) You can invest the \$500 in a bank account and earn 4%. What is the implied interest rate for the alternative a) and which investment should you choose? • • Answer: • • Implied rate: 3.714% So choose alternative (b) because it pays a higher rate of interest. Finding the Number of Periods • Start with basic equation and solve for t (remember your logs) • FV = PV(1 + r)t • t = ln(FV / PV) / ln(1 + r) • You can use the financial keys on the calculator as well, just remember the sign convention. Number of Periods – Example 1 • You want to purchase a new car and you are willing to pay \$20,000. If you can invest at 10% per year and you currently have \$15,000, how long will it be before you have enough money to pay cash for the car? • Formula Approach • t = ln(20,000 / 15,000) / ln(1.1) = 3.02 years • Calculator Approach • I/Y = 10 • PV = -15,000 • FV = 20,000 • CPT N = 3.02 years Number of Periods – Example 2 • Suppose you want to buy a new house. You currently have \$15,000 and you figure you need to have a 10% down payment. If the type of house you want costs about \$200,000 and you can earn 7.5% pe...
View Full Document

## This document was uploaded on 02/06/2014.

Ask a homework question - tutors are online