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CalPolySLO
April 18th 2008, 05:17 PM
Greetings.

This is my first time posting on the forum, and I would greatly appreciate some help with a problem I am working on right now. I am a Financial Management student currently enrolled at California Polytechnic State University, San Luis Obispo. My question pertains to my Fixed Income Securities course.

Question: What is the value of an investment that pays \$6700 every other year forever, if the first payment occurs 4 years from today and the discount rate it is 13% compounded daily?

First I found the EAR
(1+.13/365)^365 - 1 = .138802 or 13.8802%

Then, to account for the payments being received every other year I did this:
r = (1 + .138802)^2 - 1
r = .29687 or 29.687%

Then I solved for PV immediate (PVi)
PVi = c/r
PVi= 6700 / .29687
PVi = \$22,568.80

Then I discounted PVi back 4 years to account for the deferred payment
PV = (1/1+EAR)^n * PVi
PV = (1/1.138802)^4 * (22,568.80)
PV = \$13,418.86

I would really appreciate it if somebody could let me know if I did this right or not. And if I did it wrong, what should I do to get it right?

Thank you

wat
April 18th 2008, 08:05 PM
Greetings.

This is my first time posting on the forum, and I would greatly appreciate some help with a problem I am working on right now. I am a Financial Management student currently enrolled at California Polytechnic State University, San Luis Obispo. My question pertains to my Fixed Income Securities course.

Question: What is the value of an investment that pays \$6700 every other year forever, if the first payment occurs 4 years from today and the discount rate it is 13% compounded daily?

First I found the EAR
(1+.13/365)^365 - 1 = .138802 or 13.8802%

Then, to account for the payments being received every other year I did this:
r = (1 + .138802)^2 - 1
r = .29687 or 29.687%

Then I solved for PV immediate (PVi)
PVi = c/r
PVi= 6700 / .29687
PVi = \$22,568.80

Then I discounted PVi back 4 years to account for the deferred payment
PV = (1/1+EAR)^n * PVi
PV = (1/1.138802)^4 * (22,568.80)
PV = \$13,418.86

I would really appreciate it if somebody could let me know if I did this right or not. And if I did it wrong, what should I do to get it right?

Thank you

You're very close, but just a little bit off. If your annuity payments are on t = 4, 6, 8, 10, 12, ..., then your biannual annuity-immediate should start at t = 2. Why? Because annuity-immediates are paid at the end of the period, and t = 4 marks the end of the 2-year period if your period begins at t = 2.

So, assuming your biannual annuity-immediate perpetuity is correct, you discount that value for 2 years, not 4.

CalPolySLO
April 18th 2008, 08:30 PM
That makes sense. Thank you very much