Читать книгу Fundamentals of Financial Instruments - Sunil K. Parameswaran - Страница 98

Consider a deal where we are offered the vector of cash flows depicted in Table 2.4, in return for an initial investment of $30,000. The question is, what is the rate of return that we are being offered? The rate of return r is obviously the solution to the following equation.

The solution to this equation is termed as the Internal Rate of Return. It can be obtained using the IRR function in EXCEL. In this case the solution is 11.6106%.

Note 5: A Point About Effective Rates

Let us assume that we are asked to compute the present value or future value of a series of cash flows arising every six months, and are given a rate of interest quoted in annual terms, without the frequency of compounding being specified. The normal practice is to assume semiannual compounding. That is, we would divide the annual rate by two to determine the periodic interest rate for discounting or compounding. In other words, the quoted interest rate per annum will be treated as the nominal rate and not as the effective rate.