Question

If a single future amount of $800 is to be received in 3 years and discounted at 6%, its present value is

$754.72.

$693.36.

$752.00.

$671.70.

__

A $50,000, 5-year note payable that pays 8% interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period and interest combinations?

5 interest periods and 8% interest.

20 interest periods and 8% interest.

20 interest periods and 2% interest.

5 interest periods and 2% interest

__

The amount of interest involved in any financing transaction is based on each of the following except the

interest rate.

time.

principal.

present value of 1 factor.

Answer 1

1. Present Value = Future Value * Present Value Factor (6%, 3 Years)

Present Value = $800 * 0.8396

Present Value = $671.70

Therefore, the correct answer is -

(D) $671.70

2. No. of periods = 5 * 4 = 20

Rate of interest on note = 8%

Assuming the rate of 8% is per annum, the interest rate per quater shall be 2%.

So, a $50,000, 5-year note payable that pays 8% interest quarterly would be discounted back to its present value by using tables that would indicate 20 interest periods and 2% interest.

So, the correct answer is -

(C) 20 interest periods and 2% interest.

3. formula for computing Interest in a financial transaction -

Interest = Principal * Interest Rate * Time.

Therefore, out of the given options Principal, Interest Rate, Time are relevant. Only present value of 1 factor is irrelevant.

Therefore, the correct answer is -

(D) present value of 1 factor.

( It is assumed that the interest mentioned in the question is Simple Interest payable and not the difference between Present Value and Future Value. If the required interest is the difference between Present Value and Future Value, then the present value of 1 factor shall be relevant and Interest Rate will be irrelevant. The answer in that case would be (A) Interest Rate.)