Unformatted text preview: the sign convention matters!!!
PV = -1,000 (you pay 1,000 today)
FV = 1,200 (you receive 1,200 in 5 years)
CPT I/Y = 3.714% 21
21 Discount Rate – Example 2 Suppose you are offered an investment
Suppose that will allow you to double your money in
6 years. You have $10,000 to invest.
What is the implied rate of interest?
What r = (20,000 / 10,000)1/6 – 1 = .122462 =
22 Discount Rate – Example 3 Suppose you have a 1-year old son and
Suppose you want to provide $75,000 in 17 years
towards his college education. You
currently have $5,000 to invest. What
interest rate must you earn to have the
$75,000 when you need it?
$75,000 r = (75,000 / 5,000)1/17 – 1 = .172688 =
23 Quick Quiz – Part III What are some situations in which you might want to
know the implied interest rate?
You are offered the following investments: You can invest $500 today and receive $600 in 5 years. The
investment is considered low risk.
You can invest the $500 in a bank account paying 4%.
What is the implied interest rate for the first choice and which
investment should you choose?
24 Finding the Number of Periods Start with basic equation and solve for t
Start (remember your logs)
(remember FV = PV(1 + r)t
t = ln(FV / PV) / ln(1 + r) You can use the financial keys on the
You calculator as well; just remember the sign
25 Number of Periods – Example 1 You want to purchase a new car and you
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 t = ln(20,000 / 15,000) / ln(1.1) = 3.02 years 26
26 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 plus an
additional 5% of the loan amount for closing
costs. Assume the type of house you want will
cost about $150,000 and you can earn 7.5%
per year, how long will it be...
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