Asked by Jessica Lopez on May 28, 2024
Verified
The present value of $1 received 2 years from now,given the current interest rate of 8%,is about
A) $.92
B) $.86
C) $.83
D) $1.08
E) $1.17
Present Value
The present value of a future amount of money or series of cash inflows, calculated using a predetermined interest rate.
Interest Rate
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets over a specific time frame, often noted on an annual basis.
- Understand deeply the principle of present value and the way it responds to shifts in interest rates and the passage of time.
Verified Answer
AD
Aleksandra DmitrievaMay 31, 2024
Final Answer :
B
Explanation :
The present value (PV) of $1 received 2 years from now at an 8% interest rate can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($1), r is the annual interest rate (0.08), and n is the number of years (2). Plugging in the values gives PV = $1 / (1 + 0.08)^2 = $1 / (1.08)^2 = $1 / 1.1664 ≈ $0.86.
Learning Objectives
- Understand deeply the principle of present value and the way it responds to shifts in interest rates and the passage of time.