Suppose you receive$130 at the end of each year for the next three years. a. If the interest rate is10%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in(a)? c. Suppose you deposit the cash flows in a bank account that pays 10%interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)?
Suppose you receive$130 at the end of each year for the next three years. a. If the interest rate is10%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in(a)? c. Suppose you deposit the cash flows in a bank account that pays 10%interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose you receive$130 at the end of each year for the next three years.
a. If the interest rate is10%, what is the present value of these cash flows?
b. What is the future value in three years of the present value you computed in(a)?
c. Suppose you deposit the cash flows in a bank account that pays 10%interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)?
Expert Solution
Step 1
The PV of an asset is the value of all its cash flows today discounted at an assumed interest rate.
The FV of an asset is the value of all its cash flows at a particular future date growing at an assumed interest rate.
Both the PV and the FV use the concept of TVM in their calculations.
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