Formulas and Functions

Table Of Contents

Chapter 6 Financial Functions 143

Example 2

In this example, you are presented with an investment opportunity. The opportunity is to invest in

a discount security today and then pay or receive nothing further until the security matures. The

discount security matures in 14 years and has a redemption value of $100,000. Your alternative is to

leave your money in your money market savings account where it is expected to earn an annual

yield of 5.25%.

Using the PV function, you can determine the maximum amount you should be willing to pay for this

discount security today, assuming you want at least as good an interest rate as you expect to get on

your money market account. Based on the assumptions given, it would be –$48,852.92 (the function

returns a negative amount since this is a cash outow).

periodic-rate num-periods payment future-value when-due

=PV(B2, C2, D2,

E2, F2)

0.0525 14 0 100000 1