In a brief 1 to 2-page essay, decide whether you would be willing to pay $24,099 today in exchange for $100,000 in 30 years. What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?
The above question will yield 4.86% per annum, which worked out as follows.
| A / 1 | B | C | D | E |
| 2 | Present payment | $24,099 | ||
| 3 | Future receipt | $100,000 | ||
| 4 | Future receipt at the end of | 30 | years | |
| 5 | The Rate of return= | 4.86% | per annum | =RATE(C4,0,-C2,C3,0) |
If the rate of return per annum in the market available are more than 4.86% then we will not be accepting the exchange offer. If the market rates are lower to 4.86%, then the exchange option can be accepted; provided the person who is making the promise that at the end of 30 years the payment of $100,000 has to have a good credit worthiness. If the person promising is not having a good credit rating, then accepting his exchange offer will be highly risky.
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