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A building society adds interest monthly to investors’ account even through interest rates are expressed in annual terms. The current rate of interest is 6% per annum. An investor deposits $1,000 on 1 January. How much interest will be earned by 30 June?
My answer is $30 but it’s wrong. In the revision kit the answer is $30.38. How to obtain the answer?
Because the interest is added monthly, the interest rate per month = 6/12 = 0.5%
Therefore the total after 6 months = 1,000 x 1.005^6 = 1,038
If you bothered checking my workings you would have realised I made a typing mistake by typing too fast
1,000 x 1.005^6 = 1,030.38 !!
In the BPP book, the working is as follows,
1,000 x [1.005]^6] – 1,000– Why 1,000 has been subtracted?
Good heavens!!!
If you deposit $1,000 and later get back $1,030.38, why do you think you get back more than you deposited???
At discount rate 5%, $69,500 positive
At discount rate of 14%, 16,900 positive
At discount rate of 20%, 10,500 negativeWhat is the best approximate of the IRR?
Answer is 17.6%-In order to get an answer, I have taken discount rate at 5% and 20%.
However in the BPP book, the discount rate has been taken at 14% and 20%Could you explain why?
You must start a new thread when you are asking about a different topic!
The closer together the two guesses are, then the better the approximation. It is because the relationship is not linear (as I explain in my lectures).
What is the present value of 10 annual payments of $700, the first paid immediately and discounted at 8%?
I have got $4,697 as answer but in the book, it says $5,073
Could you help me please?
Thanks.
You have assumed that the payments are from year 1 to year 10.
However since the question says that the first payment is immediately, the payments are at time 0 and in addition from year 1 to year 9.
I do have understand the logic from your above explanation but still, I am unable to reach the answer
The PV of 700 now is 700.
To get the PV of 700 from years 1 to 9, you multiply 700 buy the 9 year annuity factor.Then you add the two together!
An investment will produce an annual return of $1500 in perpetuity with the first receipt starting in 3 years time?
What is the present value of this perpetuity discounted at 6%?
The answer is $22,250Could to obtain the answer?
Thanks.
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