Question

1. A business acquaintance promises to deliver a $20 bill to you one year from today. How much should you be willing to pay today for this promise? More than $20 Exactly $20 Less than $20 2. What is the present value of $1,000 received three years from today if interest rates are currently 6 percent? $943.40 $839.62 $1,191.02 $1,000.00 3. What is the interest rate on a three-year investment with a future value of $1000 and a present value of $863.84?

Answer 1

Answer and Explanation:

The computation is shown below;

1. The willing amount to pay for the promise should be less than $20 that represents the time value of money

2. Now the present value is

= Received amount × discounting factor at 6% for 3 years

= $1,000 × 0.839

= $839

3. Now the interest rate is

As we know that

Future value = Present value × (1 + rate of interest)^number of years

$1,000 = $863.84 × (1 + rate of interest)^3

rate of interest =5% approx