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eBook

PV and Effective Annual Rate

Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for $4$ payments of $$50(1$ payment at the end of each of the next $4$ years$)$ plus an extra payment of $$1,000$ at the end of Year $4.$ Your friend says she can get you some of these securities at a cost of $$925$ each. Your money is now invested in a bank that pays an $8\%$ nominal $($quoted$)$ interest rate but with quarterly compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

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