In: Finance
You have just purchased a four-month, $600,000 negotiable CD,
which will pay a 7.5 percent annual interest rate.
a. If the market rate on the CD rises to 8
percent, what is its current market value?
b. If the market rate on the CD falls to 7.25
percent, what is its current market value?
The payout of the four-month $600000 negotiable CD at 7.5%
annual interest rate is calculated as:
=$600000*(1+7.5%*4/12)
Here 4 refers to the time period of the CD, that is 4 months and 12
refers to the total months in the year.
Payout=$600000*(1+7.5%*4/12)
=$600000*(1.025)
=$615000
Part a:
Here, we need to calculate the amount that pays $615000 (in 4
months time) when invested at 8%.
So, amount*(1+8%*4/12)=$615000
Here, 4 refers to the time period in months and 12 refers to the
total months in the year.
=>Amount*(1+8%*4/12)=$615000
=>Amount*(1.026666667)=$615000
=>Amount=$615000/(1.026666667)=$599025.9738
So, current value=$599025.9738
Part b:
Here, we need to calculate the amount that pays $615000 (in 4
months time) when invested at 7.25%.
So, amount*(1+7.25%*4/12)=$615000
Here, 4 refers to the time period in months and 12 refers to the
total months in the year.
=>Amount*(1+7.25%*4/12)=$615000
=>Amount*(1.024166667)=$615000
=>Amount=$615000/(1.024166667)=$600488.2016
So, current value=$600488.2016