Question 1: Calculate the present value of $5000 received five years from today
ID: 2645586 • Letter: Q
Question
Question 1: Calculate the present value of $5000 received five years from today if your investments pay:
6 percent compounded annually
8 percent compounded annually
10 percent compounded annually
10 percent compounded semiannually
10 percent compounded quarterly
What do your answers to these questions tell you about the relation between present values and interest rates and between present values and the number of compounding periods per year?
Question 2: Calculate the future value in five years of $5,000 received today if your investments pay:
6 percent compounded annually
8 percent compounded annually
10 percent compounded annually
10 percent compounded semiannually
10 percent compounded quarterly
What do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year?
Explanation / Answer
Answer 1: Present value of $5000 received five years from today can be calculated with the below formula as per the given interest Rates
PV = FV X ( 1 / (1+i)Power n)
Where PV = Present Value , FV = Future Value, i = Interest Rates per Annum & n = Period
Using the above formula we have
This Shows with more interest rate the present values reduces thus better interest rates asks for lesser investment today to achieve a future value .In the Similar concept present values and the number of compounding periods per year are also related if the Interest rates are compounded more times in year there is a decrease in Present Value . Thus one receives/pays more interest with Interest coumpound semi annually or Quarterly compared to Yearly.
Answer 2: The future value in five years of $5,000 received today can be calculated with the below formula as per the given interest Rates
FV = PV (1+i)Power n
Where PV = Present Value , FV = Future Value, i = Interest Rates per Annum & n = Period
Using the above formula we have
This Shows with more interest rate the future values increases thus better interest rates gives better results on investment to achieve .In the Similar concept Future values and the number of compounding periods per year are also related- if the Interest rates are compounded more times in year there will be a increase in Future Value . Thus one receives/pays more interest with Interest coumpound semi annually or Quarterly compared to Yearly.
Five Years Calculation Interest Rate Future Value Present Value Interest rate 6% 5000 3736.290864 Interest rate 8% 5000 3402.915985 Interest rate 10% 5000 3104.606615 Interest rate compounded Semiannually 10% 5000 3069.566268 Interest rate compounded quarterly 10% 5000 3051.354714Related Questions
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