Question

A great opportunity came up. You have a chance to get an investment that pays $500 at the end of every six months for the next three years. APR is 12%. Here is the trick, interest is compounded quarterly. Find the PV of the investment

(Please breakdown answer using financial calculator, ex: PV, FV, PMT, N, I and how you came up with each value...thanks!)

Answer 1

As the compounding frequency and payment frequencies are different, one needs to adjust the discount rate such that the compounding and payment frequencies become equal to each other.

APR = 12 % and Compounding = Quarterly

Effective Semi-Annual (6 monthly) Rate = [1+(0.12/4)]^(2) - 1 = 0.0609 or 6.09 % per half-year

The problem can be solved using a financial calculator as described below:

- Input PMT = $ 500, N = 3 x 2 = 6 half-years, I/Y = 6.09 %, FV = $ 0

- COMPT -> PV

- PV = - $ 2451.73 or $ 2451.73