Question

Calculate the amount you will receive from the sale of a certificate of initial deposit of 9 months, initial amount of 150000 at 5% interest rate, when the corresponding risk and long-term placements yield 10% and 6, 4, and 2 months remain to expire

Answer 1

It is assumed that 150000+Interest 5% i.e. 157500 will be received after 9 months. No intermediate interest will be paid. Further, it is also assumed that long term yields of 10% are compounded monthly.

Therefore, to find we will receive from sale of certificate, we nedd to calculate Present Value of 157500 at the time remaining to expiry.

Present Value = Future Value ÷ (1+i)ⁿ

where i = interest rate for every period i.e. month over here = 10/12 = 0.8333%

and n = number of periods i.e. months over here = 6, 4 and 2

Applying above formula in all situations

6 months to expiry

Present Value = 157500 ÷ [1+0.008333]⁶ = 157500÷1.0511 = $1,49,843.02

4 months to expiry

Present Value = 157500 ÷ [1+0.008333]⁴ = 157500÷1.0338 = $1,52,350.55

2 months to expiry

Present Value = 157500 ÷ [1+0.008333]² = 157500÷1.0167 = $1,54,912.95

(Note: All the above answers are given by rounding Discounting Factor to 4 digits after decimals. There might be SLIGHT difference in the answer due to ROUNDING DIFFERENCE. Please Ignore that)

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