For a quoted annual interest rate of 5% with daily compounding, find the effective (i) annual rate, (ii) monthly rate, (iii) daily rate. Use the rates found in (i) – (iii) to find the present value (PV) you need to invest today to reach $75,000 in 5 years.
For a quoted annual interest rate of 5% with daily compounding, find the effective (i) annual rate, (ii) monthly rate, (iii) daily rate. Use the rates found in (i) – (iii) to find the present value (PV) you need to invest today to reach $75,000 in 5 years.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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For a quoted annual interest rate of 5% with daily compounding, find the effective (i) annual rate, (ii) monthly rate, (iii) daily rate. Use the rates found in (i) – (iii) to find the
Expert Solution
Step 1: Explain the Present value
Present value refers to the current value of the annuity that is determined by discounting the cash flow with the interest rate over the maturity period.
Effective interest rate refers to the interest rate continuously compounded for a given period of time, Eg monthly, weekly, annually, daily etc.
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