How do I determine the interest rate received on annual payments?Prev Topic Next Topic

New Topic New Poll

JWBlue

San Diego, CA
United States
Member #58,384
February 12, 2008
335 Posts
Offline

Mar 9, 2008, 10:20 am

Quote: Originally posted by Mike Frazier on Mar 9, 2008
I don't have a spreadsheet at work (where I do most of my LP interaction), or I would have played with the formula I posted yesterday and given you an estimate.

However, tonight I tried just using the Windows calculator and it wasn't so hard.

Based on 27 payments, the interest rate falls between 4.7 and 4.8 percent. Not a good return on your investment, imho. Take the cash.

Thanks for taking the time to do that.

For people that are conservative, that 4.7% isn't a bad deal. I would actually consider taking it!
bashley572

West Side of Sunny Florida
United States
Member #55,046
September 8, 2007
3,371 Posts
Offline

Mar 9, 2008, 10:57 am

I agree with Mike, as the main issue in my opinion is

What is a BETTER rate of return - Cash or annuity?

But one issue that everyone is failing to take into account is RISK. As everyone has a different risk tolerance everyone's return on the cash option would be different. But if you take the annuity it is the same.

For example I have a realative that had over 100k in her credit union and would ONLY put the money in 3 month cd's !! best she could earn was about 2-4% at a time. Then she would complain about the return. I had many conversations about risk and better returns but she still didn't want to use anything but her credit union and no longer than 3 months.

Money won is twice as good as money earned!
JAP69

South Carolina
United States
Member #6
November 4, 2001
8,966 Posts
Offline

Mar 9, 2008, 11:33 am

Quote: Originally posted by KY Floyd on Mar 8, 2008
It works exactly like any other loan. They owe you 5.3 million now, but they pay it to you in annual installments of $346,154 totalling $9 million. After the first payment they still owe you about $5 million. A rate of 4.66% compounded monthly would repay the remainder in annual installments of $346,310, which is close enough. A payment that increases each year definitely complicates the math. They already know the interest rate and do a simple amortization table. Working backwards to figure out what the rate is a collossal PITA, and require a program, and not ust asimple loan calculator. There are two other things you may also want to consider.

1. Why does it matter what the interest rate is when you know exaclty what the actual payment will be?
2. You will be earning that 4.66% interest on the 35 to 42% that you would lose to taxes if you choose the lump sum. To earn 346k on the $3.445 million you'd have after paying federal taxes you'd need to earn 10% interest.

2. You will be earning that 4.66% interest on the 35 to 42% that you would lose to taxes if you choose the lump sum. To earn 346k on the $3.445 million you'd have after paying federal taxes you'd need to earn 10% interest.

And that is not counting the principal being spent from the zitgo to upgrade your lifestyle taking cash option.

Would not take much to go thru a half mil or better.
Mike Frazier

Fayetteville, Arkansas
United States
Member #58,960
March 2, 2008
29 Posts
Offline

Mar 10, 2008, 12:40 am

Quote: Originally posted by JWBlue on Mar 9, 2008
Thanks for taking the time to do that.

For people that are conservative, that 4.7% isn't a bad deal. I would actually consider taking it!

You're welcome.

As I think has been pointed out, you still have to pay taxes on that 4.7%, so you're going to lose at least a third of that. Figure on 3.1%, with state taxes (if any) subtracting still more.

I think you can get more than this by investing in municipal bonds, which are tax-free and quite secure.

Tell you what, if you win, I volunteer to manage your money for you, keeping 25% of whatever I can get you above what the lottery would pay, taking taxes into account. I think I'll get rich -- and you'll get considerably richer!

The balls have no memory.
time*treat

United States
Member #13,130
March 30, 2005
2,171 Posts
Offline

Mar 10, 2008, 12:56 am

Quote: Originally posted by bashley572 on Mar 9, 2008
I agree with Mike, as the main issue in my opinion is

What is a BETTER rate of return - Cash or annuity?

But one issue that everyone is failing to take into account is RISK. As everyone has a different risk tolerance everyone's return on the cash option would be different. But if you take the annuity it is the same.

For example I have a realative that had over 100k in her credit union and would ONLY put the money in 3 month cd's !! best she could earn was about 2-4% at a time. Then she would complain about the return. I had many conversations about risk and better returns but she still didn't want to use anything but her credit union and no longer than 3 months.

The question of risk pricing is not something we can all put the same numbers on. That's not return ON capital, that's return OF capital. The guys at LTCM couldn't survive getting it wrong even once, and they are nobel prize winners. If there is little risk, there is little reward. If there is opportunity for large gains, there must be (on the other side of the trade) a chance of taking a large loss. When you sell your winning stock "at the top", someone somewhere just bought ... at the top. And you both paid commissions.

In neo-conned Amerika, bank robs you.
Alcohol, Tobacco, and Firearms should be the name of a convenience store, not a govnoment agency.