N = 5, FV = 600, PMT
= 100; CPT I/Y = 7 years.
?
Example: Solve for the PMT given a 13-year annuity with a discount rate of 6%, and a PV of
$2,000.
?
N = 13, I/Y = 6, PV = 2,000; CPT PMT = $225.92.
?
Example: Suppose that you have $1,000 in the bank today. If the interest rate is 8%, how
many annual, end-of-year payments of $150 can you withdraw?
?
I/Y = 8, PMT = 150, PV = -1,000; CPT N = 9.9 years.
?
Example: What rate of return will you earn on an annuity that costs $700 today and promises
to pay you $100 per year for each of the next 10 years?
?
N = 10, PV = 700, PMT = 100; CPT I/Y = 7.07%.
p
e: Calculate the PV of a perpetuity.
Example: Assume a certain preferred stock pays $4.50 per year in annual dividends (and
they're expected to continue indefinitely). Given an 8% discount rate, what's the PV of this
stock?
PV
perpetuity
= PMT / I/Y
PV
perpetuity
= 4.50 / .08 = $56.25
This means that if the investor wants to earn an 8% rate of return, she should be willing to
pay $56.25 for each share of this preferred stock.
f: Calculate an unknown variable, given the other relevant variables, in perpetuity problems.
Example: Continuing with our example from LOS 1.A.e, what rate of return would the
investor make if she paid $75.00 per share for the stock?
I/Y = PMT / PV
perpetuity
4.50 / 75.00 = 6.0%
g: Calculate the FV and PV of a series of uneven cash flows.
FV Example: Given: I = 9%; PMT
1
is $100; PMT
2
is $500; and PMT
3
is $900. How much is
this future stream worth at the end of the 3
rd
year?
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