Question

Agreus agreed to pay Sophie $2,000 plus interest compounded yearly at 5% 3 years from now and $2,000 plus interest compounded yearly at 5% 5 years from now. Sophie decides to sell the contract to Vignette at the 1.5-year mark to yield 5.5% compounded semi-annually.

a) Make the timeline for this problem.
b) Calculate the price paid by Vignette.

Answer 1

To calculate the price Vignette paid, the future values of the two payments were first calculated and then discounted back to the 1.5-year mark using the formula for present value. Vignette's desired yield was used for the discounting process, resulting in a combined present value of $4049.35.

Step-by-step explanation:

The scenario described in the question deals with compound interest for two different compounding periods and a change in the ownership of the financial contract within 1.5 years to yield a different interest rate.

a) Timeline:

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b) Price Paid by Vignette:

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