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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Question
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![**Question:**
What is the present value of a $500 payment made in four years when the discount rate is 8 percent?
**Multiple Choice Options:**
- $460.00
- $680.24
- $365.35
- $367.51
**Explanation:**
This question is asking you to calculate the present value (PV) of a future payment of $500, which you will receive in four years. The discount rate provided is 8 percent.
**Understanding Present Value:**
Present value is a financial concept that represents the current worth of a future sum of money or stream of cash flows, given a specified rate of return (discount rate). In this example, the discount rate is 8 percent, and the future value is $500, which you would receive in four years.
**Formula for Present Value:**
The formula to calculate the present value is:
\[ PV = \frac{FV}{(1 + r)^n} \]
Where:
- \( PV \) is the present value
- \( FV \) is the future value ($500 in this case)
- \( r \) is the discount rate (8% or 0.08)
- \( n \) is the number of years until payment (4 years)
By plugging in the values:
\[ PV = \frac{500}{(1 + 0.08)^4} \]
Now, calculate \( (1 + 0.08)^4 \), divide $500 by this result, and compare it with the given multiple choice options to find out the correct present value.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F302e2d83-124e-4749-a014-0416d12786b1%2Fb871d4d6-8d4a-41b2-931e-68bd22042ce2%2F3n0y0x_processed.png&w=3840&q=75)
Transcribed Image Text:**Question:**
What is the present value of a $500 payment made in four years when the discount rate is 8 percent?
**Multiple Choice Options:**
- $460.00
- $680.24
- $365.35
- $367.51
**Explanation:**
This question is asking you to calculate the present value (PV) of a future payment of $500, which you will receive in four years. The discount rate provided is 8 percent.
**Understanding Present Value:**
Present value is a financial concept that represents the current worth of a future sum of money or stream of cash flows, given a specified rate of return (discount rate). In this example, the discount rate is 8 percent, and the future value is $500, which you would receive in four years.
**Formula for Present Value:**
The formula to calculate the present value is:
\[ PV = \frac{FV}{(1 + r)^n} \]
Where:
- \( PV \) is the present value
- \( FV \) is the future value ($500 in this case)
- \( r \) is the discount rate (8% or 0.08)
- \( n \) is the number of years until payment (4 years)
By plugging in the values:
\[ PV = \frac{500}{(1 + 0.08)^4} \]
Now, calculate \( (1 + 0.08)^4 \), divide $500 by this result, and compare it with the given multiple choice options to find out the correct present value.
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