When calculating the present value of a stream of payments at a market yield of 5% compounded semi- annually, the numerator in the fourth period of the calculation is:
A) (1.05) to the power of 4.
B) (1.025) to the power of 4.
C) (1.10) to the power of 4.
D) (1.0125) to the power of 4.

Question

Quizplus · Accepted Answer

The market yield of 5% compounded semi-annually means the interest rate per period is 2.5% (5%/2). Therefore, the factor for each period is (1 + 0.025) or 1.025. For the fourth period, it is (1.025) to the power of 4.

When Calculating the Present Value of a Stream of Payments