Asked by Pavlog Pawluk on May 21, 2024
Verified
If the interest rate is 10%, the present value of $1 next year is:
A) $1.20.
B) $1.10.
C) 91 cents.
D) 10 cents.
E) 9 cents.
Interest Rate
The percentage charged by a lender to a borrower for the use of assets, typically expressed as an annual percentage of the principal.
Present Value
The present value of a future amount of money or a series of cash flows, calculated using a predetermined rate of return.
$1
Symbolizes a unit of currency, typically referring to one dollar in jurisdictions using dollar-denominated currencies.
- Learn the approach to compute present and future valuations when dealing with varying interest rates.
Verified Answer
YC
Yasir ChandiaMay 27, 2024
Final Answer :
C
Explanation :
To calculate the present value of $1 next year, we need to use the formula: PV = FV/(1 + r), where PV is the present value, FV is the future value, and r is the interest rate as a decimal. Plugging in the given numbers, we get PV = 1/(1 + 0.1) = 0.909 = 91 cents. Therefore, the correct answer is C.
Learning Objectives
- Learn the approach to compute present and future valuations when dealing with varying interest rates.