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Marco
October 10th 2005, 11:02 AM
hI there can anyone help me to understand this excercise please is urgent.

I do not understand if you first find a equilvalent rate that is suppose to use in the present value equation why do you use 2 rates to solve the present value equation despite you got a equivalent rate to resolve the complete example??????????????????????????????????

Find the present value at time 0 years of payments of $30 at the end of each quarter for 8
years. Use a nominal rate of interest of 5% a year convertible monthly.

if you find this quartely equivalent rate of 5.0209%
Why in the equation of present value it uses annual and quartely rates to get the result of 786.61 in spite i think i should use as a future value only 30 ???????????????????????????????????''''

.Godspeed.
October 10th 2005, 02:00 PM
hI there can anyone help me to understand this excercise please is urgent.

I do not understand if you first find a equilvalent rate that is suppose to use in the present value equation why do you use 2 rates to solve the present value equation despite you got a equivalent rate to resolve the complete example??????????????????????????????????

Find the present value at time 0 years of payments of $30 at the end of each quarter for 8
years. Use a nominal rate of interest of 5% a year convertible monthly.

if you find this quartely equivalent rate of 5.0209%
Why in the equation of present value it uses annual and quartely rates to get the result of 786.61 in spite i think i should use as a future value only 30 ???????????????????????????????????''''

It's important to keep timing of payments and interest rates in the same terms. If we are going to convert this nominal interest rate to an annual effective rate, then the present value would be:

30*(v^1/4 + v^2/4 + . . . v^8)

because there are four payments per payment period (four payments per year). Here, our v=(1+(.05/12))^(-12).

If we are going to convert this nominal interest rate to its corresponding quarterly rate, then the present value would be:

30*(v + v^2 + v^3 + . . . v^32)

because there is one payment per payment period (one payment per quarter). Here, our v=(1+(.05/12))^(-12/4).

Both of these summations are geometric progressions which you should know how to solve for this test; they are both equal to 786.61, which you have already said.

These are just two ways of doing the problem leading to the same answer. You just have to stay consistent with what timing/interest rate combination you want to use.

Does this help?