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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 1year 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.
 Fall '14

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