Question

What's the present value of $11,000 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Select the correct answer.


a. $7,083.20

b. $7,025.60

c. $7,040.00

d. $7,068.80

e. $7,054.4

Answer 1

Explanation:

A = P[1 + (r/n)]^(nt)

Look the formula up online to find out what each variable represents if needed.

We are solving for P, which is the principal amount 5 years back.

Substitute 11,000 for A (total amount), 4.5% for r(rate), 2 for n(number of times -- in this case, semiannually), and 5 for t(time -- 5 years).

11000 = P[1+(0.045/2)]^(2x5)

11000 = P (1.0225)^10

11000 = P (1.2492) approx.

Divide both sides by 1.2492 to find P.

P = $8805.64 (approx)

I know that the answer I got is not an option listed. However, I feel that my workings may help other people to answer this question or give them inspiration to answer similar questions. Therefore, I will leave this answer up.

Thanks, and sorry I couldn't do much.