Question

You have been offered an investment that pays $500 at the end of every 6 months for the next 3 years. The nominal interest rate is 12 percent; however, interest is compounded quarterly. What is the present value of the investment? 1. $2,458.66 $2,444.67 $2,451.73 $2,463.33 $2,437.56

Answer #1

Calculation of present value of the investment | ||||

Quarter | Cash flow | Discount factor @ 3% | Present Value | |

1 | $0.00 | 0.970874 | $0.00 | |

2 | $500.00 | 0.942596 | $471.30 | |

3 | $0.00 | 0.915142 | $0.00 | |

4 | $500.00 | 0.888487 | $444.24 | |

5 | $0.00 | 0.862609 | $0.00 | |

6 | $500.00 | 0.837484 | $418.74 | |

7 | $0.00 | 0.813092 | $0.00 | |

8 | $500.00 | 0.789409 | $394.70 | |

9 | $0.00 | 0.766417 | $0.00 | |

10 | $500.00 | 0.744094 | $372.05 | |

11 | $0.00 | 0.722421 | $0.00 | |

12 | $500.00 | 0.70138 | $350.69 | |

Present value of Investment |
$2,451.73 |
|||

Quarterly Interest rate = 12%/4 = 3% |

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