[camaroracr21]

1. You invest $100 in a savings account paying an 8% interest rate compounded annually. How
much will you have in the account after 1 year? How much will you have in the account
after three years?
2. Assume you will receive $126 dollars in three years. How much is that future payment
worth now assuming an 8% interest rate compounded annually?
3. Consider a claim that pays $100 at the end of each year for five years plus an additional
$1,000 payment at the end of the fifth year. Determine the present value of the claim at the
beginning of the first year assuming an applicable annual interest (discount) rate of 8%
compounded annually.
4. Instead consider the claim that pays $100 at the end of each year for three years plus an
additional $1,000 payment at the end of the third year. Determine the present value of the
claim at the beginning of the first year assuming an applicable annual interest (discount) rate
of 8% compounded annually.

[ebaines]

We're not going to do your homework for you. You must first attempt to do this yourself - if you're having difficulty, post what you've tried and we'll help you. But you haven't even tried. Take the first question for example: if you invest $100 at 8% interest, what is the interest you receive for the first year? I'm confident that if you read your text book you'll be able to answer this one.

[camaroracr21]

well I was able to answer the first question but I'm not sure if it is correct. I got 108 for after the first year and 126 for after the third year. I am confused on the wording of the second question. For the last two I think I can get most of the problem if the equation is the same as question 1 but I am not sure if present value has to do with the principle and they mean the same thing

[ebaines]

Each of these questions uses the formula that relates future value (FV) to present value (PV) for a given interest rate (I) and number of years (n):

FV = PV(1+i)^n

1. FV = $100(1+0.08)^3 = $125.97

2. Rearrange the formula to get present value in terms of future value:

PV = FV/(1+i)^3

3 and 4. Apply the formula to a series of payments - you determine the PV for each separate future payment, then add them up.

[camaroracr21]

2) I got 126/1.259712 which gives a present value of 100.02
3)for this question after doing all of the math I got 1010 as the present value.
4) I got a present value of 1051.54

sound correct?

[ebaines]

2) i got 126/1.259712 which gives a present value of 100.02

Correct.

3)for this question after doing all of the math i got 1010 as the present value.

I get a different answer. I wonder if you only considered 4 payments of $100 (and a final payment of $1000) instead of five payments of $100?

4) i got a present value of 1051.54
sound correct?

Yes - correct!

[camaroracr21]

Well for number 3 the question stated that you get 100 for each of the 5 years and the fifth year you get an additional 1000 so would you use 1100 instead of 1000?

[ebaines]

well for number 3 the question stated that you get 100 for each of the 5 years and the fifth year you get an additional 1000 so would you use 1100 instead of 1000?

Right.

[camaroracr21]

after redoing the third problem I get a present value of 1079.84. Is that what you got?

[ebaines]

after redoing the third problem i get a present value of 1079.84. is that what you got?

Yes it is!

[camaroracr21]

Thanks for all of your help I appreciate it