Finance Solver

[Andy Kemp]

I suspect I am being a bit slow this evening but I am trying to get my head round the Finanace Solver - Which I've never used before...

I have a questions where £750 is invested in an account with interest calculated on a monthly basis, and after 4 years there is £1100 in the account.  Find the interest rate...

So I have set the following:
N=48
PV=-750
Pmt=0
FV=1100
PpY=12
CpY=12
PmtAt = End

Which gives me the correct answer or about 9.6%...

My confusion is that is I change PpY to be 1 and recalculate then I get and answer of 0.8%...  But as there are no payments being made I didn't think this should make a difference...  I suspect I have missed the point of what PpY does...

Can someone enlighten me??

Thanks
Andy

[Lana Golembeski]

Ppt is # payments per year

Sent from my iPhone

Lana

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[Andy Kemp]

That what I thought... So if Pmt is 0, why does changing PpY change the value of I(%)?

Sent from my iPhone

[Nelson Sousa]

N=48 and PPY=12 means a 4 year loan/investment with monthly payments.

N=48 and PPY=1 means a 48 year loan/investment with yearly payments.

So, I think you see where your reasoning is failing you :)

Cheers,

Nelson

[Andy Kemp]

Thanks, I can see that is what is happening, although I am still a little unsure why the PpY effects the answer when Pmt is 0.  After some further exploring it seems the best way to tackle this problem is actually:

N=4 and PpY=1, and CpY=12

My confusion stems from this double use of 'Payment', to indicate both money paid in/out of the account regularly and also its effect on the Interest rate...  I am fairly happy that I understand what it is doing...  I'm just not quite clear in my head as to why...

[Nelson Sousa]

I think the issue is more related with CPY, which is the numer of compound periods per year. If we choose CPY=1, even with PPY=12 we get an interest rate that is exactly the interest rate of the case PPY=1 and N=48 to the 12th power, as expected. 

Nelson