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Anonymous

Finance question 2017-03-08 01:09:40 Post No. 1841616

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Finance question 2017-03-08 01:09:40 Post No. 1841616

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Hi, I was doing some finance problems and I stumbled across this one.

"Someone invests $1000 at the end of each year for the next 5 years at an interest rate of 7% pa compounded semi annually. What is the value of this in today's dollar?

I know this is an annuity, and I know the interest rate has to be changed from annual nominal to annual effective. What I am unsure about is what today's dollar means? Does it mean I should solve for future or present value?

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>Finance question

You lost me there buddy

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>>1841616

is finance an actual university major? never knew that

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>>1841616

use excel then work out the solution

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>>1841616

Figure out the FV based on the information you have, then discount it. It sounds to me like they want to know PV assuming you put all the money in at once, up front, rather than in annual payments.

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>>1841677

It is a very poorly worded question.

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>>1841616

annual rate is

(1+i2)^1=(1+i)^0.5 -> 0.1449

isn't it?

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>>1841689

Should be about 7.1%

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>>1841689

No. (1 + .035) ^ 2

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>>1841691

Bingo. 7.1225% to be exact

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>>1841699

No, you are definitely wrong. It doesn't say 7% semi-annually. It says 7% compounded semi-annually. Very different.

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>>1841706

0.07 compounded semi annually means that for every dollar invested you get 1*(1+0.07) at the end of the first semester and 1*(1+0.07)^2 at the end of the second semester, so the equivalent annual rate should be 1*(1+0.07)^2-1 which is the equivalent rate of return on annual basis. Care to explain your reasoning?

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>>1841724

Just read his question again. It says "7% pa" (per annum). That means the 7% is the rate for the entire year. Compounding means that it is subdivided.

Just look up the n=2 example on here, can probably explain it better than me:

http://www.investopedia.com/terms/c/compounding.asp

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>>1841735

missed the pa, thanks anon

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>>1841735

If you had a mortgage that was at a 4% interest rate and compounded monthly, you wouldn't apply the 4% every month. You divide it by the number of periods(12), so the monthly interest would be calculated as 4%/12 = 0.333%. Semi-monthly just means 2 periods instead of 12.

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>>1841741

Yeah I missed it at first too. All good.

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>>1841616

All bullshit aside, buy one of these:

>https://www.amazon.com/Texas-Instruments-Plus-Financial-Calculator/dp/B00000JZKB

It has TVM (time value of money) functions to solve for present value, payments, interest, etc. and helped me through all of my finance and accounting course work during undergrad.

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>>1841756

Good purchase, although Excel has all the TVM functions too, and chances are you already have that.

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came up with this. npv is 0 and that 5000 is to neat to be bad. OP post solution

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>>1841814

What if "today" was 12/31? :D

Again, very shitty question.

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>>1841828

all finance exercises look like that man, I truly hate them because they fucking lack data and I always get shit wrong in them but I get shit right in more pro fucking shit like beta estimation it's very frustrating

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>>1841616

My attempt.

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>>1841890

I think the exercise implies these annuities have no maturity ie they provide total annual payment based on rate forever

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>>1841907

generally annuities are contracts you can't compound on because you can't purchase more annuity, you just receive payment. compound interest in this case has to be taken into account to find effective rate and discount factor, still OP is a faggot and has to post solution

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>>1841932

that's because textbook exercises suck. If OP didn't say they were annuities I would have reasoned like you. Still we don't know which kind of annuities

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>>1841909

I think you're confusing this with a perpetual annuity. A normal annuity has an end and the formulas between the two are different.

I agree with >>1841907 in that you should apply the interest to the current balance at that time(including prior interest), not only on the original principal. If you only apply it to the original principal that would be considered simple interest, not compound.

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>>1841941

>If OP didn't say they were annuities I would have reasoned like you

Problem being he's come onto an anime picture sharing site to ask a finance question, so his 'knowing that this is an annuity' is hardly a reliable statement. I took the question at face value.

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>>1841946

I know but OP specified they are annuities which require the same payment over time, he also didn't specify maturity so they should be perpetual annuities

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>>1841952

But the question says 5 years, so I would safely assume that's the maturity. I came up with FV of $6175.41

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>>1841952

Also you say "same payment over time." Remember it said they're investing that. I'm assuming that's what you meant. It's not money coming out of the annuity.

Once again, it's a vague question and can be interpreted in various ways.

"Today's dollar" is not a technical term

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>>1841616

Present.

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>>1841963

>>1841890

Following your reasoning and assuming investment ends during year 5 I came up with this which is similar to >>1841890 but I furthered with the present value discounting. Still track is too vague

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OP here, I don't have a solution, we had a surprise quiz. Also if it helps it is an ordinary annuity since equal cash flows, equally spaced and finite years

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>>1841997

You only show 4 years of $1000 contributions in your sheet. My last year had the $1000 plus the interest when it was all said and done. That's where I got $6175.41.

I think my number is off, but you should have at least had $5000 going in, you only have $4000.

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>>1841997

Here's what I had. The last column assumes value after interest at the end of the 5th year.

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>>1842021

I meant that to be a sub-screenshot, but oh well haha

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>>1842017

1000 is invested at the end of every year and investment ends in year 5 so there's no sense in investing and immediately getting back 1000 dollars at the end of year 5. Don't know what to get out of the track here

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>>1842025

Yeah that's what I mean. So if you contributed $1k at the end, then you should have come up with $5764.81 for FV even though the last cash flow beared no interest.

Once again, shitty question. If you had this as a pop quiz I'd call out your prof.

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>>1842021

actually you're accounting the interest of a sixth year, interest should be gained only in 4 years out of 5 in this case because in the first year nothing is invested. only at the end of it investment starts

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Take a look at this from UMASS:

http://people.umass.edu/som640/ps4.pdf

Question 2.

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>>1841998

man I keep discounting annuities at coupon rate and guess what I come up with 0 as NPV, so there's something off in the track

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>>1842036

true. ill go to sleep, keep kickin anon

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>>1842039

The original question is what "today's dollars" means. May be a trick question. Considering you wouldn't invest until the end of the year, and assuming that today is not the end of the year(12/31), the answer would be $0.

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>>1842040

Peace. This may have been the most fun thread on here in a while. Good shit.

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OP, show Jenni this thread if you got it wrong

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>>1841616

How'd I do /biz/?

I'll check through the thread.

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i'm glad financial companies hire engineers and not finance majors to do their quant analysis. you motherfuckers suck at math.

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>>1842674

Would you have an unlicensed pre-med student put a stint in your heart? In 10 years that pre-med student will be qualified to be your heart surgeon.

At least they're trying and they're not actually at a firm yet you cunt.

>practicing annuity payments on 4chan hurts people

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