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 some securities which call for four payments, R50 at the end of each of the next 3 years, plus a payment of R1,050 at the end of Year 4.Your friend says she can get you some of these securities at a cost of R900 each.Your money is now invested in a bank that pays an 8 percent simple (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?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) is calculated using the formula: EAR = (1 + 0.08/4)^4 - 1 = 0.0824 or 8.24%. The present value (PV) of the securities is calculated by discounting each cash flow at this rate: PV = 50/(1.0824)^1 + 50/(1.0824)^2 + 50/(1.0824)^3 + 1050/(1.0824)^4 = R893.

Assume That You Inherited Some Money