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You have been offered a note that will pay $4,500 at the end of each of...

You have been offered a note that will pay $4,500 at the end of each of the next four years. The price of the note to you is $13,700. The rate of return you will earn if you buy this note is ____%.

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Answer #1

Price of note = Present Value of Annual amount received discounted at rate of return

13700 = 4500/(1+rate of return)^1 +4500/(1+rate of return)^2 +4500/(1+rate of return)^3 +4500/(1+rate of return)^4

We will use heat and trial method to get that value of rate of return for which above equation satisfies.

Rate of return = 11.89% Answer

We can also get above value using financial calculator:

N =4

PV = -13700

PMT = 4500

FV = 0

Compute I/Y

I/Y = rate of return = 11.89%

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