1.Compute the PV of a $13,395.00 payment made in 7 years when the discount rate
ID: 2817656 • Letter: 1
Question
1.Compute the PV of a $13,395.00 payment made in 7 years when the discount rate is 8.23%.
$8,217.29
$8.006.37
$7,700.33
$7,429.95
2)You deposit $425.00 into an account which pays 1.25% for the first two years. However, the rate of interest drops to 0.75% thereafter. About what is the value of your investment four years from today [assme annual compounding].?
$446.65
$442.25
$426.28
$20.37
3.You have $3,000.00 in an account that pays 3.2% annual interest. About how many additional dollars of interest would you earn over a two years period if you moved the money to an account earning 5.1%?
$57.00
$87.23
$118.73
$128.54
$8,217.29
$8.006.37
$7,700.33
$7,429.95
Explanation / Answer
1.Present value=$13395*Present value of discounting factor(rate%,time period)
=$13395/1.0823^7
=$13395*0.574865692
=$7700.33(Approx).
2.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence
A=$425*(1+1.25/100)^2*(1+0.75/100)^2
=$425*1.040591259
=$442.25(Approx).
3.
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
For 3.2% annual interest:
A=$3000*(1.032)^2
=$3000*1.065024
=$3195.072
For 5.1% annual interest:
A=$3000*(1.051)^2
=$3000*1.104601
$3313.803
Hence excess dollars=$3313.803-$3195.072
which is equal to
=$118.73(Approx).
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