How do you figure out today's buyout value for a note that matures in

[henslee]

10 years and pays 7.5%. Is there special formula you use?

[TheBaldyMan]

1. do you mean how much is it worth today?

is it compounded annually and do you want to take inflatiion into account?

simply put compounding the interest figured annually for ten years at 7.5% is:

(face value)x (1.075)^10=(value in 10 years time)

[henslee]

2. This is helpful. Now, how would I factor in inlfation?

[TheBaldyMan]

3. figure it to depreciate the value at the end of each year

so inital amount grows by 7.5% and shrinks by lets say 4% each year to give an overall annual growth rate of (1.075/1.04) this would effect the original equation and it would become:

(original amount)x (1.075/1.04)^10

obviously inflation doesn't stay exactly the same every year so you have to 'guesstimate' what the effect of inflation would be over the time period. The average rate for US inflation over the last 10 years would be a decent estimate for the next ten years but wouldn't exact.

Actually I think that inflation will increase over the next few years and remain high because of fuel prices. The Fed and the Bush administration will probably try to rationalise this as not important but your bills have probably gone up noticably already.