Present Value Analysis and EFF%
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Suppose someone offered to sell you a note calling for the payment of $1,000 fifteen months from today. They offer to sell it to you for $850.00. You have $850.00 in a bank time deposit that pays a 6.76649% nominal rate with daily compounding , which is a 7% effective annual interest rate, and you plan to leave the money in the bank unless you buy the note. The note is not risky- you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank, (2) by comparing the PV of the note with your current bank account, and (3) by comparing the EFF% on the note versus that of the bank account.
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Solution Summary
Excel spreadsheet compares present values and EFF percentages of notes and bank accounts to determine whether to buy the note.
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