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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 $50 (1payment at the end of each of the next 4 years) plus an extra payment of $1,00 at the end of year 4. Your friend says she can get you some of the securities at a cost of $900 each. Your money is now invested in a bank that pays 8% normal (quoted) interest rate but with quartely compounding. You regard the securities as being 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?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91535719

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