Multiple Choice
If you borrow \$10,000 at an annual interest rate of 8\% compounded semiannually, what is the amount of interest charged for the first 6 months?
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10. Time Value of Money
Time Value of Money Equations
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
What is the present value of \$1 to be received in 3 years, discounted at an annual rate of 6%?
A
\$0.94
B
\$0.88
C
\$0.84
D
\$0.79
Verified step by step guidance1
Understand the concept of present value: Present value (PV) is the current worth of a future sum of money, discounted at a specific interest rate over a given period of time. The formula for present value is PV = FV / (1 + r)^n, where FV is the future value, r is the annual discount rate, and n is the number of years.
Identify the given values in the problem: The future value (FV) is \$1, the annual discount rate (r) is 6% (or 0.06 in decimal form), and the number of years (n) is 3.
Substitute the given values into the present value formula: PV = 1 / (1 + 0.06)^3.
Simplify the denominator: Calculate (1 + 0.06)^3. This involves adding 1 and 0.06 to get 1.06, then raising 1.06 to the power of 3.
Divide the future value (\$1) by the calculated denominator to find the present value. This step completes the calculation, yielding the present value of \$1 discounted at 6% over 3 years.
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