Question

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?

Answer 1

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.