calculating the interest rate参考.ppt

Chapter 11: Ordinary Annuities: Payment Size, Term, and Interest Rate 11.3 calculating the interest rate Circumstances in which people need to calculate the interest rate include: Determining the rate of return required for a periodic savings plan to reach a savings goal in a specified length of time. Determining the implied interest rate earned by a lump investment used to purchase a specified annuity. Determining the interest rate implied by specified loan payments. Determining the implied interest rate charged when a periodic payment plan is offered as an alternative to a lump payment. Financial calculator method Calculation of nominal and effective interest rate j=m*i (8-1) f=(1+i)m-1 (9-3) i is the interest rate per compounding interval (or periodic interest rate) m is the number of compoundings per year Example A life insurance company advertises that $50,000 will purchase a 20-year annuity paying $420 at the end of each month. What (monthly compounded) nominal rate of return and effective rate of return is the annuity investment earning? (calculate interest rates accurate to 0.01%.) Solution: An=$50,000 term=20 years R=$420 n=20*12=240 payment interval=1 month Example What annually compounded rate of return must Rachel earn in her RRSP in order for month-end contributions of $500 to accumulate to $600,000 after 25 years? Solution: Sn=$600,000 n=25*12=300 R=$500 payment interval=1 months Example An manufacturer’s advertisement announce: “3.9% factory financing over 48 months or $1500 cash back.” If a car buyer finances $15,000 of a car’s purchase price at the low interest rate instead of paying cash and qualifying for the $1500 rebate, what is the buyer’s effective rate of interest? Solution: Borrowing $15,000 at 3.9% from the car manufacturer. j=3.9% compounded annually term=48 months n=48 An=$15,000 payment interval=1 month p=i=j/m=0.325% we must calculate the payments on the $15,000 loan.