Suppose someone offered to sell you a note calling for the payment of $1,200 in three years. They offer to sell it to you for $880. You have $880 deposit in a bank that pays a 9.5% nominal rate with daily compounding, and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank, (2) by comparing the present value of the note with your current bank account, and (3) by comparing the effective annual rate on the note versus that of the bank account.
Suppose someone offered to sell you a note calling for the payment of $1,200 in three years. They offer to sell it to you for $880. You have $880 deposit in a bank that pays a 9.5% nominal rate with daily compounding, and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank, (2) by comparing the present value of the note with your current bank account, and (3) by comparing the effective annual rate on the note versus that of the bank account.
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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- Suppose someone offered to sell you a note calling for the payment of $1,200 in three years. They offer to sell it to you for $880. You have $880 deposit in a bank that pays a 9.5% nominal rate with daily compounding, and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your
future value if you buy the note versus leaving your money in the bank, (2) by comparing thepresent value of the note with your current bank account, and (3) by comparing the effective annual rate on the note versus that of the bank account.
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