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3 votes
Below are time value factors of $1 for 8% interest over four

periods.




1
2
3
4




1
1.0000
0.92593
1.08000
0.92593


2
2.0800
0.85734
1.16640
1.78326


3
3.2464
0.79383
1.25971
2.57710


4
4.5061

2 Answers

4 votes

Final answer:

The present value of a two-year bond with 8% interest rate can be calculated by discounting the future cash flows at the same interest rate. If the discount rate increases to 11%, the present value of the bond decreases, illustrating the inverse relationship between discount rates and present values.

Step-by-step explanation:

Calculation of Present Value for a Two-Year Bond

To determine the present value of a two-year bond with an 8% interest rate, we need to discount the future cash flows back to their present value using the given interest rate. For the first year, the bond pays $240 in interest. The present value of the first year's interest payment is calculated as:

Present Value Year 1 = $240 / (1 + 0.08)¹ = $222.22

At the end of the second year, the bond pays an additional $240 in interest plus the $3,000 principal. The present value of these payments is calculated as:

Present Value Year 2 = ($240 + $3,000) / (1 + 0.08)² = $2,777.78

Total present value of the bond when the discount rate is 8% is the sum of the present values for each year:

Total Present Value = $222.22 + $2,777.78 = $3,000

However, if the discount rate increases to 11%, we need to recalculate the present value of these cash flows using the new rate:

Present Value Year 1 at 11% = $240 / (1 + 0.11)¹ = $216.22

Present Value Year 2 at 11% = ($240 + $3,000) / (1 + 0.11)² = $2,630.63

The total present value at an 11% discount rate is:

Total Present Value at 11% = $216.22 + $2,630.63 = $2,846.85

These calculations show that the present value of future cash flows decreases as the discount rate increases.

User Niel
by
8.3k points
1 vote

The time value factors of $1 represent the future value and present value of $1 over four periods at an 8% interest rate.

The given time value factors of $1 represent the present value and future value of $1 over four periods at an 8% interest rate. The columns represent different scenarios:

  1. Column 1 represents the future value of $1.
  2. Column 2 represents the present value of $1.
  3. Column 3 represents the future value of an ordinary annuity of $1.
  4. Column 4 represents the present value of an ordinary annuity of $1.

Therefore, the correct answer is future value of an ordinary annuity of $1.

The complete question is here:

Below are time value factors of $1 for 8% interest over four periods.

Column 1 represents the:

Multiple Choice

A. future value of an ordinary annuity of $1.

B. present value of $1.

C. future value of $1.

D. present value of an ordinary annuity of $1.

Below are time value factors of $1 for 8% interest over four periods. 1 2 3 4 1 1.0000 0.92593 1.08000 0.92593 2 2.0800 0.85734 1.16640 1.78326 3 3.2464 0.79383 1.25971 2.57710 4 4.5061-example-1
User Subbu
by
8.3k points