Question
In: Finance
An investor pays $10,000 today to purchase an investment that returns $5,000 at the end of...
An investor pays $10,000 today to purchase an investment that returns $5,000 at the end of each of years 2, 4, and 5. The returns are immediately reinvested at an annual interest rate of 5%. Calculate the annual effective yield rate for the investor at the end of the fifth year.
(a) 9.91% (b) 12.00% (c) 12.45% (d) 13.11% (e) 15.13%
Solutions
Expert Solution
We first need to calculate the sum of the Future value of the cash inflows at the enf of year 5:
Below is the future value calculation:
| Year | CF | Compounding Factor | Compounded CF | ||
| 2 | $ 5,000.00 | (1+0.05)^(5-2)= | 1.157625 | 1.157625*5000= | $ 5,788.13 |
| 4 | $ 5,000.00 | (1+0.05)^(5-4)= | 1.05 | 1.05*5000= | $ 5,250.00 |
| 5 | $ 5,000.00 | (1+0.05)^(5-5)= | 1 | 1*5000= | $ 5,000.00 |
| Future Value = Sum of all Compounded CF | $ 16,038.13 |
Now annual return is calculated as follows:
So the annual return is 9.91% and the correct option is a
jeff jeffy answered 1 year agoRelated Solutions
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----------------------------------------------
I got
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So would it just be NPV = -500 + 100(v)^2 + 200v^3 + 300v^4?
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