Question

A 6-years deposit was made with 300 K EUR four years ago with 15% of interest rate. The deposit pays everything at the maturity with compound interest. Somebody wants to buy your deposit now. The customer will calculate with 17% of expected return.

a) How much money can you get for your deposit?

b) What percent return did you realize with this deal?

Answer 1

a)Amount you can get =Present Value of future cash flow

Amount to be received after TWO years=Maturity Value

=300000*((1+0.15)^6)

=693918.23 EUR

Expected Return =17%=0.17

Present Value of future cash flow=693918.23 /((1+0.17)^2)=506916.67 EUR

Amount you can get now

506916.67 EUR

b)

Investment four years ago=300000EUR

Amount you can get now=506916.67 EUR

Assume , return realized =r

300000*((1+r)^4)=506916.67

(1+r)^4=506916.67/300000=1.689722

1+r=1.689722^(1/4)=1.1401

Return Realized=1.1401-1=0.1401

Percent Return Realized(Annualized)=14.01%