Unformatted text preview: car. You agree to pay
$207.58 per month for 60 months. What is the
monthly interest rate?
monthly Sign convention matters!!!
CPT I/Y = .75% 28
28 Annuity – Finding the Rate
Without a Financial Calculator
Without Trial and Error Process Choose an interest rate and compute the PV of the
payments based on this rate
Compare the computed PV with the actual loan amount
If the computed PV > loan amount, then the interest rate
is too low
If the computed PV < loan amount, then the interest rate
is too high
Adjust the rate and repeat the process until the
computed PV and the loan amount are equal
29 Quick Quiz – Part III You want to receive $5,000 per month for the next 5
years. How much would you need to deposit today if
you can earn .75% per month?
What monthly rate would you need to earn if you only
have $200,000 to deposit?
Suppose you have $200,000 to deposit and can earn .
75% per month. How many months could you receive the $5,000
How much could you receive every month for 5 years? 30
30 Future Values for Annuities Suppose you begin saving for your
Suppose retirement by depositing $2,000 per year
in an IRA. If the interest rate is 7.5%, how
much will you have in 40 years?
much FV = 2,000(1.07540 – 1)/.075 = 454,513.04 31
31 Annuity Due You are saving for a new house and you
You put $10,000 per year in an account paying
8%. The first payment is made today.
How much will you have at the end of 3
years? FV = 10,000[(1.083 – 1) / .08](1.08) =
32 Annuity Due Timeline
0 10000 1 10000 2 3 10000
33 Perpetuity – Example 6.7 Perpetuity formula: PV = C / r Current required return: 40 = 1 / r
r = .025 or 2.5% per quarter Dividend for new preferred: 100 = C / .025
C = 2.50 per quarter 34
34 Quick Quiz – Part IV You want to have $1 million to use for
retirement in 35 years. If you can earn 1% per
month, how much do you need to deposit on a...
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