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May 31st, 2013, 05:48 PM   #1
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Compund Interest

I have no idea where to begin!

A two-payment stream consisting of $1750 due today and $2900 due in 18 months is to be replaced by an economically equivalent stream comprised of an undetermined payment due in 9 months and a payment of $3000 due in 19 months. Calculate the unknown replacement payment if money is worth 9% compounded monthly.
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June 1st, 2013, 08:04 AM   #2
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Re: Compund Interest

The data are:







In order that the two operations be equivalent it is required that the financial situation be the same for the creditor at the most distant time.

It is not clear from context if the capitals due must be capitalized on maturity or are already the effective amounts. In the first case we have:



that is



In the second case we have:

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June 1st, 2013, 04:57 PM   #3
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Re: Compund Interest

f = 1 + .09/12 = 1.0075

x = f^9(1750 + 2900/f^18 - 3000/f^19) = 1799.11522182...
OR
x = (1750f^19 + 2900f - 3000) / f^10 = 1799.11522182...
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June 2nd, 2013, 08:20 AM   #4
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Re: Compund Interest

My memories in financial mathematics are perhaps a bit far. I forgot to divide by 12, which is the interest rate per annum (http://math.about.com/library/weekly/aa042002a.htm), as Davis noted in its solution.
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June 2nd, 2013, 04:40 PM   #5
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Re: Compund Interest

Who is Davis? Didn't see that name at your suggested site...
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