3. Present value

Finding a present value is the reverse of finding a future value.

is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.

Which of the following investments that pay will $9,500 in 14 years will have a lower price today?

The security that earns an interest rate of 8.25%.

The security that earns an interest rate of 5.50%.

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 5.40%. Assuming that both investments have equal risk and Erics investment time horizon is flexible, which of the following investment options will exhibit the lower price?

An investment that matures in seven years

An investment that matures in six years

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.

4. Finding the interest rate and the number of years

The future value and present value equations also help in finding the interest rate and the number of years that correspond to present and future value calculations.

If a security currently worth $9,200 will be worth $15,767.18 seven years in the future, what is the implied interest rate the investor will earn on the securityassuming that no additional deposits or withdrawals are made?

0.24%

1.71%

6.40%

8.00%

If an investment of $50,000 is earning an interest rate of 8.00%, compounded annually, then it will take for this investment to reach a value of $89,052.92assuming that no additional deposits or withdrawals are made during this time.

Which of the following statements is trueassuming that no additional deposits or withdrawals are made?

If you invest $5 today at 15% annual compound interest for 82.3753 years, youll end up with $100,000.

If you invest $1 today at 15% annual compound interest for 82.3753 years, youll end up with $100,000.