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