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Chapter 5: Q. 15 (page 324)

Find the principal needed now to get each amount; that is, find the present value to get $100 after 2 years at 6% compounded monthly

Short Answer

Expert verified

The answer is $88.72

Step by step solution

01

Step 1. Given information 

The amount, A=$100

The rate of interest, r=6%=6100=0.06

The time period, t=2years

The investment compounded monthly, n=12

02

Step 2. Use Present value formulas

The present value P of A dollars received after t years, assuming a per annum interest rate r compounded n times per year, isP=A1+rn-nt

03

Step 3. Calculation

Substitute the values in the Present value formula,

P=$1001+0.0612-12脳2P=$1001.005-24P=$10011.00524P=$1000.99524P=$1000.88718P=$88.72

The Present value, P=$88.72

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