Question

If the interest rate this year is 8% and the interest rate next year will be 10%, what is the future value of $1 after 2 years? what is the present value of a payment of $1 to be received in 2 years?

Answer 1

the interest rate is 8% for first year and 10 % for the second year for 1$.

Interest for 1st year= (P.N.R)/100 =(1.1.8)/100= 8/100=0.08.

Now the amount will be 1.08 for first year .

Here N=1 because we are calculating interest from first year

interest for second year =(P.N.R)/100=(1.08.1.10)/100=1.8/100=0.018.

now the 1$ after two year with two interest rates will be (1.08+0.018)=1.098$.