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F.Chap06

# 025 c 250 per quarter 34 34 quick quiz part iv you

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Unformatted text preview: monthly basis if the first payment is made in one month? one What if the first payment is made today? You are considering preferred stock that pays a You quarterly dividend of \$1.50. If your desired return is 3% per quarter, how much would you be willing to pay? be 35 35 Work the Web Example Another online financial calculator can be found Another at MoneyChimp at Click on the web surfer and work the following Click example example Choose calculator and then annuity Choose You just inherited \$5 million. If you can earn 6% on You your money, how much can you withdraw each year for the next 40 years? for Money chimp assumes annuity due!!! Payment = \$313,497.81 36 36 Table 6.2 37 37 Effective Annual Rate (EAR) This is the actual rate paid (or received) after This accounting for compounding that occurs during the year the If you want to compare two alternative If investments with different compounding periods you need to compute the EAR and use that for comparison. comparison. 38 38 Annual Percentage Rate This is the annual rate that is quoted by law By definition APR = period rate times the number of By periods per year periods Consequently, to get the period rate we rearrange the Consequently, APR equation: APR Period rate = APR / number of periods per year You should NEVER divide the effective rate by the You number of periods per year – it will NOT give you the period rate period 39 39 Computing APRs What is the APR if the monthly rate is .5%? What is the APR if the semiannual rate is .5%? .5(12) = 6% .5(2) = 1% What is the monthly rate if the APR is 12% with What monthly compounding? monthly 12 / 12 = 1% 40 40 Things to Remember You ALWAYS need to make sure that the interest rate You and the time period match. and If you are looking at annual periods, you need an annual If rate. rate. If you are looking at monthly periods, you need a monthly If rate. rate. If you have an APR based on monthly compounding, If you have to use monthly periods for lump sums, or adjust the interest rate appropriately if you have payments ot...
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