Question

If the interest rate this year is 8.8% and the interest rate next year will be 10.8%, what is the future value of $1 after 2 years? What is the present value of a payment of $1 to be received in 2 years?

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

The interest rate this year is 8.8% and the interest rate next year will be 10.8%.

a) To calculate the future value, we need to use the following formula:

FV= PV*(1+i)^n

FV1= 1*1.088= 1.088

FV2= 1.088*1.108=$1.206

b) To calculate the present value, we need to use the following formula:

PV=FV/(1+i)^n

PV2= 1/1.108= 0.903

PV1= 0.903/1.088= $0.83