Time value of money money

richer

For quarterly compounding, some question have calculated PV by calculating the EAR first, then used EAR to determine PV. So far I have been using the approach of compounding periods e.g. N=no of compounding periods i.e. if 5 years and quarterly compounding means N=20 and if the given rate is 5% then I/Y=5/4. Is there any difference in two approaches? Do they both lead to same result? Am I confused between bond and TVM problems?

studyn

I think they yield the same result.

Take a small example:
10% stated annual rate has 2.5% quarterly rate

Its EAR = 1.025^4-1=10.38%.

It's basically the same when you use N=4 and I/Y = 2.5

Cheers.

rgonzalez

I think for the question I got wrong did not yield the same. Does anyone else have any other opinion on this?

dontknow1987

It depends how they provide the rate of return.

If they give the periodic rate say 10% compounded semi annually, then u need to convert it to EAR if using N yearly periods:

EAR = (1+periodic)^(m) ] - 1

periodic = stated rate / m

so in this example...10% compounded semiannually is the stated rate:

EAR = ((1 + (.10/2))^(2)) - 1 = 10.25% annual rate = use that rate with N = annual periods.

both approaches do yield the same result as long as the I and the N match in units (ie: both monthly) but I would say it is better to convert the stated rate to an annual rate for many questions.

pacmandefense

ext Wrote:
-------------------------------------------------------
> It depends how they provide the rate of return.
>
> If they give the periodic rate say 10% compounded
> semi annually, then u need to convert it to EAR if
> using N yearly periods:
>
> EAR = (1+periodic)^(m) ] - 1
>
> periodic = stated rate / m
>
> so in this example...10% compounded semiannually
> is the stated rate:
>
> EAR = ((1 + (.10/2))^(2)) - 1 = 10.25% annual rate
> = use that rate with N = annual periods.
>
> both approaches do yield the same result as long
> as the I and the N match in units (ie: both
> monthly) but I would say it is better to convert
> the stated rate to an annual rate for many
> questions.


If both of them yield the same result then why clause?

siavosh

Why dont you post the question you got wrong here? It's easier to do on example than explain generally. If you want a good answer, post a detailed question!

Jolyn

maxmeomeo Wrote:
-------------------------------------------------------
> Why dont you post the question you got wrong here?
> It's easier to do on example than explain
> generally. If you want a good answer, post a
> detailed question!


Question I am not posting because of copyright issue..