If it were evaluated with an interest rate of zero percent, a 10-year ordinary annuity would have a present value of $4,000. If the future (compounded) value of this annuity, evaluated at Year 10, is $6,425, what nominal interest rate must the analyst be using to find the future value?
I can see two different ways of doing this problem.
1) With a $4,000 present value at a zero interest rate, the payment amount is equal to the present value divided by the number of periods (10). Thus, the payment amount is 400.
Now that we have the payment amount, we can plug in the rest of the data into the calculator:
FV=6425
PMT=400
N=10
I/Y=?
Computed: I/Y=10.16296890% or 10.16%
or
2)
PV=4000
FV=6425
N=10
I/Y=?
Computed? I/Y=4.85310944
Which one (if either) is correct?
2007-04-04
03:17:36
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0 answers
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asked by
Greg C
7
in
Other - Business & Finance