Question

Find the present value of $500 due in the future under each of these conditions:

14% nominal rate, semiannual compounding, discounted back 6 years. Do not round intermediate calculations. Round your answer to the nearest cent.

$ 14% nominal rate, quarterly compounding, discounted back 6 years. Do not round intermediate calculations. Round your answer to the nearest cent.

$ 14% nominal rate, monthly compounding, discounted back 1 year. Do not round intermediate calculations. Round your answer to the nearest cent. $

Why do the differences in the PVs occur?

Answer 1

1.Information provided:

Future value= $500

Time= 6 years*2= 12 semi-annual periods

Interest rate= 14%/2= 7% per semi-annual period

Enter the below in a financial calculator to compute the present value:

FV= 500

N= 12

I/Y= 7

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

The value obtained is 222.

Therefore, the present value is $222.

2.Information provided:

Future value= $500

Time= 6 years*4= 24 quarters

Interest rate= 14%/4= 3.50% per quarter

Enter the below in a financial calculator to compute the present value:

FV= 500

N= 24

I/Y= 3.50

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

The value obtained is 218.98.

Therefore, the present value is $218.98.

3.Information provided:

Future value= $500

Time= 1 years*12= 12 months

Interest rate= 14%/12= 1.16667% per month

Enter the below in a financial calculator to compute the present value:

FV= 500

N= 12

I/Y= 1.16667

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

The value obtained is 435.03.

Therefore, the present value is $435.03.

4.The differences in present values occur because compounding periods per year differs.

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