lecture_chap05_06A

You currently have 5000 to invest what interest rate

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

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