Question

30. You receive $4,000 every three months beginning three months from today for 7 years and an additional $1,200 7 years from today. If the interest rate is 3.0% (EAR), which of the following is closest to the present value (PV) of this stream of cash flows?

How should I solve this using the hp10bii+ calculator? If you could show me the steps that would be great!

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L	M
2
3		First payment starts at month	3
4		Amount paid every 3 month	$4,000
5		Additional amount to be paid at the end of year 7	$1,200
6		Interest rate (EAR)	3%
7		Period	7	Years
8		Since the amount is paid quarterly therefore the quarterly interest rate needs to be calculated.
9		Compounding frequency	4
10		Total number of quarters	28
11
12		Assuming the quarterly interest rate is r,
13		then
14		(1+r)4 = (1+3%)
15		Using the above equation,
16		r	0.74%	=((1+D6)^(1/D9))-1
17
18		The amount required today will be the present value of future cash flows.
19		Quarter	0	1	2	3	4	…	23	28
20		Payment		$4,000	$4,000	$4,000	$4,000	$4,000	$4,000	$5,200	=$D$4+D5
21
22		Present value of payments	=Present value of annuity of $4000 for 28 quarters at 0.74% rate + PV of $1200 paid at 28th quarter at 0.74%
23			=4000*(P/A,0.74%,28)+1200*(P/F,0.74%,28)
24
25		Present value of cash flows can be found by entering the following values in financial calculator:
26		FV	$1,200
27		PMT	($1,200.00)
28		I/Y	0.74%	(Enter 0.74 in place of 0.74%)
29		N	28
30
31		After entering the above values, press PV which will given the bond price in negative.
32
33		PV of cash flows	$29,264.01	=PV(D28,D29,D27,D26)
34
35		Hence PV of cash flows is	$29,264.01
36

Formula sheet