Question

Investment A pays $4,245 per month for the next 9 months Investment B pays $1,743 per...

Investment A pays $4,245 per month for the next 9 months

Investment B pays $1,743 per month for the next 16 months.

If the market interest rate is 4.39 % APR compounded monthly, what is the difference in the market

price of the two assets? (state your answer as a positive number)

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Answer #1

Monthly Interest Rate = 0.0439/12 = 0.0036583

Period Discounting Factor
[1/(1.0036583^period)]		 Discounting Factor Annuity
(Sum of discounting factor & all previous discounting factors)
1 0.996355034 0.996355034
2 0.992723355 1.989078389
3 0.989104912 2.978183301
4 0.985499659 3.96368296
5 0.981907546 4.945590506
6 0.978328527 5.923919033
7 0.974762553 6.898681586
8 0.971209577 7.869891163
9 0.967669552 8.837560715
10 0.964142429 9.801703144
11 0.960628163 10.76233131
12 0.957126707 11.71945801
13 0.953638013 12.67309603
14 0.950162035 13.62325806
15 0.946698727 14.56995679
16 0.943248043 15.51320483

Value of Investment A = Annuity*Discounting Factor for 9 periods = 4245*8.83756 = 37515.44

Value of Investment B = Annuity*Discounting Factor for 16 periods = 1743*15.5132 = 27039.51

Difference = 37515.44-27039.51 = $10475.93

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