Question

What's the present value of $1,700 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly? a. $1,335.95 b. $1,298.14 c. $1,398.97 d. $1,411.57 e. $1,260.33

Answer 1

e. $1,260.33

Step-by-step explanation:

If the annual rate is 6%, the monthly interest rate 'r' is:

`r= (6\%)/(12)=0.5\%`

The present value 'P' of an investment 'F', discounted at a monthly rate 'r' for a period of 'n' years is:

`P=(F)/((1+r)^(12*n))`

If the future value after 5 years at a rate of 0.5% per month is $1,700, the present value is:

`P=(\$1,700)/((1+0.005)^(12*5))\\P=\$1,260.33`

The present value is $1,260.33.