Interest rates and maturity dates

Time Value of money

The four variables in the future and present values of the time value of money equation are FVn,PV, n, and i. in order to solve for any one of the variables, you must know the other three. to solve for interest rates, for example, you need to know the present value, future value, and number of years for which the security is compounded.

For example ,assume the present value of a security is $300 , the future value of the security is $150, and interest is compounded for three years.to solve for I,plug the three values into either the present value of future value equation. The following is the equation for calculating:

$150 =$300(1+i)3

to solve this equation , you can use any of the four methods of calculation

.however , the numerical method requires you to plug interest rates into the equation and find the solution by trail and error. The tabular method will not return an exact interest rate if the rate or number of years are not whole numbers. both the financial calculator method or the spreadsheet method are ideal for solving this equation.

To use your financial calculator , enter 175 into your calculator and press the future value key (FV),enter-100 for presents value(PV),and enter three for the number of years (N).the payment key (PMT) should be zero. Now ,press then compute button (CPT),then the interest rate button (1) to calculate the interest Tate. The resulting interest rate is 20.5071 percent.

To calculate the maturity date on a security (n), you must already know the security's present value,future value ,and interest rate.similar to calculating the interest rate,you can use any of the four methods fo computing the maturity rate.

However , the numerical method requires you to plug maturity dates into the equation and find the equation and find the solution by trial and error. The tabular method will not return an exact maturity date if the rate or number of years are not whole numbers . both the financial calculator method or the spreadsheet method are ideal for solving this equation.

For example ,suppose the present value of security is $100, the future value of the security is $175, and the interest rate is five percent . the following is the equation for calculating then maturity date using the future value equation.

$175 =$100(1+.05)n

To use your financial calculator, enter 175 into the future value key(FV), enter-100 into the present value key (FV), and enter five into the interest key (I)on your calculator . the payment key should be zero. Now ,press N to calculate the maturity date. The resulting maturity date is 11.4698 periods.