Solving for Interest Rates, Growth Rates, and Number of Periods

Question 1

If a bank deposit of €100 is known to generate a payoff of €111 in one year, we can infer (compute) the interest rate that separates the present value of €100 from the future value of €111 by using…

Answer 1

1 + r = FV/PV

Question 2

G=?

Answer 2

g = (FVn/PV)^1/N - 1

Question 3

What is important to keep in mind when calculating for g?

Answer 3

When calculating g for a period of time (doesn’t matter if its increasing or decreasing),
Instead of raising to the power of 1/N, we can simply compute the nth root (1/n) of the sum in brackets.

Question 4

How do you compute nth root on a calculator?

Answer 4

Input number
Press the [yx] key
Input N
and press the [1/x] key
Press [=] to solve.

Question 5

What is the equation formula used for solving for the Number of Periods?

Answer 5

(1+r)^N = FVN/PV = x times
N ln(1+r) = ln(x times)
N = [ln(FV/PV)]/ln(1 + r)
= In(x times)/In(Rs)