Question

Derek just received a bonus and wishes to set aside a portion of it in order to save for a 10-year reunion cruise that his old college fraternity is sponsoring, 4 years from now. His broker says that he can buy a bond that matures in 4 years with an APY of 6%,The cost of the cruise is :

Answer 1

$3,168

Step-by-step explanation:

We will receive $4000 in future (after 4 years time) which means all we want to know is the amount that we Derek must deposit today.

This present value of the $4000 payment received after 4 years from today can be calculated using the following formula:

Present value = Future Value / (1 + r)^n

Here

Future Value is $4000

r is 6%

n is 4 years

So by putting values, we have:

Present value = $4000 / (1 + 6%)^4 Years

Present value = $3,168