Suppose someone offered to sell you a note calling for the payment of $1,000 in 15 months. They offer to sell it to you for $850. You have $850 in a bank time deposit that pays a 6.76649% nominal rate with daily compounding, which is a 7% effective annual interest rate, 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 PV of the note with your current bank account; and (3) by comparing the EFF% on the note with that of the bank account.
Suppose someone offered to sell you a note calling for the payment of $1,000 in 15
months. They offer to sell it to you for $850. You have $850 in a bank time deposit
that pays a 6.76649% nominal rate with daily compounding, which is a 7% effective
annual interest rate, 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 PV of
the note with your current bank account; and
(3) by comparing the EFF% on the
note with that of the bank account.
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