Question

PV and Effective Annual Rate Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for 4 payments of 570 (1 payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $950 each. Your money is now invested in a bank that pays a 6% nominal (Quoted) interest rate but with quarterly compounding. You regard the securities as being just as safe. and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you? Do not round intermediate calculations. Round your answer to the nearest cent Enter your answer as positive value.

Answer 1

This a typical problem of time value of money.

First let's categorize data as inputs and we can easily get the solution using a financial calculator

Here the normal payment every year is $70 so PMT= $70

The amount to be received at the end of the year = $1,000 so FV = $1,000

The interest rate = 6% so I/Y = 6%

No of periods here = 4 years so N = 4

Now using these inputs in the financial calculator and computing present value (PV)

We will get the output as $1034.65

So the present value of security is $1034.65