Suppose you will receive $1,000 in 6 years. If your opportunity cost is 7% annually, what...

Suppose you will receive $1,000 in 6 years. If your opportunity cost is 7% annually, what is the present value of this amount if interest is compounded every six months?
What is the effective annual rate?

Solutions

Expert Solution

Present value of money:	=	FV/ (1+r/M) ^MN



Future value	FV=	1,000.00
Rate of interest	r=	7.0%

Number of compounding periods in a year	M=	2



Number of years	N=	6

Present value	=	1000/ (1+0.07/2)^6 × 2
	=	$ 661.78

Present value is $661.78

EAR:


	Effective annual interest rate=	(1+periodic interest rate)^m -1

rs=	Stated interest rate	7.00%

m	number of compoundings in a year	2
rs/m	period interest rate	3.5000000%


	Effective annual interest rate=	(1+0.035)^2 -1

	Effective annual interest rate=	7.12%

jeff jeffy answered 1 year ago

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