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Suppose Kim has $800 due in the future and the nominal rate is 6%, please find...

Suppose Kim has $800 due in the future and the nominal rate is 6%, please find out its present value under following two conditions: (1) Semiannual compounding, discounted back 8 years (2) Quarterly compounding, discounted back 8 years. Why do the differences in the PVs occur?

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Answer #1

Part-1 3.00%) 16 $0 Part-2 1.50% [Part-1-696/2-3.00%; Part-2-696/4-1.50%) Periodic discount rate, RATE # of periods involved, NPER Periodic payments, PMT Amount due in the future, FV Annual cash flow type, TYPE Present value of given cash flow Difference in present value between two parts is on account of difference in # of frequencies per year. High NOTE For Part-1: Present Value of given cash flows is calculated using EXCEL FUNCTION PV(rate, nper,pmt,fv,type) where rate-3.00%; nper=16, pmt:0; fv-800, type:0; Here, value for fv is negative as it denotes cash inflows; type 0 because interest compounds at the end of each semiannul only For Part-2: Present Value of given cash flows is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate-1.50%; nper=32; pmt:0; fV-800, type:0; Here, value for fv is negative as it denotes cash inflows; type = 0 because interest compounds at the end of each quarter only 32 [Part-1-8 years x 2 16; Part-2 8 years x 4 32] $0 0 0-0 if compounds at the end of of each period; 1 if compounds at the beginning of each period 498.53$496.79 [Ref: NOTE] er the # of frequencies, lower the present value Part-1 -06/2 -8*2 $0 Part-2 -6%/4 [Part-1-696/2+ 3.00%; Part-2-696/42 1.50%) 2 Periodic discount rate, RATE 3 # of periods involved, NPER 4 Periodic payments, PMT 5 Amount due in the future, FV 6 Annual cash flow type, TYPE 7 Present value of given cash flow 8*4 [Part-1-8 years x2-16;Part-2-8 years x4-32 $0 0-0 if compounds at the end of of each period;1 if compounds at the beginning of each period pV(B2,03,84,-B5,B6)| -PV(C2,C3,C4,-C5,C6) [Ref: NOTE]

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