Question

1. Four years from now you will receive the first of seven annual $100 payments. The current interest rate is 7%, but by t=3, the rate will have risen to 8%. What is the present value of this cash stream?

How would I plug this in my calculator

Answer 1

In this Type of Problems, we should calculate the Present Value first upto the date of constant rates and then, upto present date. Hence, In this question, First we will calculate the present value of Cash Stream Upto T3 and for T0

It can be solved either by the assumption that rates are changed at end of 3rd Year or at Starting of 3rd Year.

Further, the most appropriate assumtion will be to consider it as changer at end of 3rd Year

Calculation of Value at T3, PVAF(8%, 4) x 100 = $ 331.21

Years from T3	Cash Inflows	PVF	Present Value
1	100.00	0.9259	92.59
2	100.00	0.8573	85.73
3	100.00	0.7938	79.38
4	100.00	0.7350	73.50
Value at T3	331.21

Now Calculate the Value of Present Value at T0 of Value at T3

= PVF ( 7%, 3) x Value at T3

= 0.8163 x 331.21 = 270.37