truly, a wtf math question [SOLVED]

[user]

You have just purchased a preferred share for $50. The company pays a dividend of $1 every quarter. One year later, when you sell teh share, the interest rate is 10% compounded quarterly. How much will you gain or lose?


Answer is a loss of $10. But how?

[Heie]

compound interest formula? too lazy to check the exact formula but i think i remember learning this in precalc

[user]

compound interest formula? too lazy to check the exact formula but i think i remember learning this in precalc

wouldn't compound interest INCREASE your capital? hence ppl are depositing money into banks?

[Grandpa]

You have just purchased a preferred share for $50. The company pays a dividend of $1 every quarter. One year later, when you sell teh share, the interest rate is 10% compounded quarterly. How much will you gain or lose?


Answer is a loss of $10. But how?

Interest rate? I'm confused here. What stock pays interest? You earned $4 during the year in dividends. I assume that you want to know how the value of the stock went from $50 to $44 during the year to make the total net gained = <-$10>?

Maybe you've confused the stock market with the bond market? Bonds will net a set amount of interest upon maturity, not stocks.

Hmmmm... Let me try another guess here. Maybe you are comparing a stock bought and sold at $50.00 where your only profit came from the dividends paid ($4) to an investment of the same amount that earned 10% compounded quarterly?

Formula for Interest Compounded Quarterly
Total Amount = P(1+(R/400))^4n
where CI = Compound Interest, P = Principal or Sum of amount, R = % Rate per annum, n = Time Span in years, so your CI would be $5.19 on a $50 principle investment as stated.

Again, I'm confused by your question, have considered several possible scenarios and remain confused. Why does your question state the interest rate at the end of the investment term anyway? How could that possibly matter? I must agree with you, this is truly a WTF math question.

~Granps

[user]

@Grandpa, is there a grandma? thats the question on my practice exam word by word. thats why the title for this post is the way it is, truly wtf

[Advancechao]

Maybe your math teacher wants you to think outside of the box!

Answer: The American dollar depreciated a whole lot over one year.

[Plutonium]

@Grandpa, is there a grandma? thats the question on my practice exam word by word. thats why the title for this post is the way it is, truly wtf

i once had a WTF math question, and someone on this forum told me to PM this guy named D2U below and he explained it to me very well.

http://silkroadaddiction.com/forum2/mem ... ath2u.html

worth a try and let us know your findings

[user]

Got it, for those who are interested, just input the following into calculator:
PMT = 1
N = 9999
i = 10/4
PV = 40 <-- worth of the share, but you bought it for 50 bucks, so you lost 10 bucks

here it is by formula, FV = PMT / i --> 1 / 0.025 --> $40

[Plutonium]

which math class are u studying for?

i think u misapply the formula when u try to work backward already knowing the answer.

methinks...
PMT is the payment amount you make each month. so how doesn that equal $1? u arent taking out a loan or anything. im confuz0r
N is the period... so how does that equal 9999?
i is the interest rate... it's 0.1 since it's 10%, so how is it 10/4? = 2.5 = 250%?


math = for me lol

[user]

which math class are u studying for? business math, annuity

i think u misapply the formula when u try to work backward already knowing the answer.

methinks...
PMT is the payment amount you make each month. so how doesn that equal $1? u arent taking out a loan or anything. im confuz0r PMT in this case is the money you are getting each period, so thats the $1 the company pays you 3 months N is the period... so how does that equal 9999? as long as you hold the shares, the company will continue to pay you $1 every 3 months, 9999 represents infinity
i is the interest rate... it's 0.1 since it's 10%, so how is it 10/4? = 2.5 = 250%? 10% is the nominal rate form, since its quarterly, there are 4 quarters in a year, so you divided by 4


math = for me lol

[thechampion80]

Maybe your math teacher wants you to think outside of the box!

Answer: The American dollar depreciated a whole lot over one year.

best answer so far

[user]

Maybe your math teacher wants you to think outside of the box!

Answer: The American dollar depreciated a whole lot over one year.

best answer so far

since the currency used had been american dollars, and you are not converting into other currency, i dont see how depreciation will even matter

[Advancechao]

Maybe your math teacher wants you to think outside of the box!

Answer: The American dollar depreciated a whole lot over one year.

best answer so far

since the currency used had been american dollars, and you are not converting into other currency, i dont see how depreciation will even matter

If you are using the 2008 dollar in your calculations, and you sell the preferred share and get the 2009 dollar value after it has depreciated for a year, you might get the equivalent of $40 2008 dollars back when you paid $50 for it. -$10.

Lolz