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In: Finance

Problem 4-17 Present Value for Various Compounding Periods Find the present value of $600 due in...

Problem 4-17
Present Value for Various Compounding Periods

Find the present value of $600 due in the future under each of the following conditions. Do not round intermediate calculations. Round your answers to the nearest cent.

  1. 10% nominal rate, semiannual compounding, discounted back 5 years
    $   
  2. 10% nominal rate, quarterly compounding, discounted back 5 years
    $   
  3. 10% nominal rate, monthly compounding, discounted back 1 year
    $  

Solutions

Expert Solution

a.Information provided:

Future value= $600

Interest rate= 10%/2= 5% per semi-annual period

Time= 5 years*2= 10 semi-annual periods

The present value is calculated by entering the below in a financial calculator:

FV= 600

I/Y= 5

N= 10

Press the CPT key and PV to compute the present value.

The value obtained is 368.35.

Therefore, the present value is $368.35   $368.

b. Information provided:

Future value= $600

Interest rate= 10%/4= 2.5% per quarter

Time= 5 years*4= 20 quarters

The present value is calculated by entering the below in a financial calculator:

FV= 600

I/Y= 2.5

N= 20

Press the CPT key and PV to compute the present value.

The value obtained is 366.16.

Therefore, the present value is $366.16    $366.

c. Information provided:

Future value= $600

Interest rate= 10%/12= 0.8333% per month

Time= 5 years*12= 60 months

The present value is calculated by entering the below in a financial calculator:

FV= 600

I/Y= 0.8333

N= 60

Press the CPT key and PV to compute the present value.

The value obtained is 364.67.

Therefore, the present value is $364.67   $365.

In case of any query, kindly comment on the solution.


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