Question

Jing Associates, LLC, a large law firm in Denver, is building a new office complex. To pay for the construction, Jing Associates is selling a security that will pay the investor the lump sum of $6,750 in five years. The current market price of the security is $5,896. Assuming that you can earn an annual return of 3.75% on your next most attractive investment, how much is the security worth to you today?

Answer 1

Answer:

The security worth $5,615 today

Explanation:

Amount of Security = $6,750

Annual rate of return = 3.75%

number of years = 5 years

Future value = Present Value x ( 1 + rate of return )^number of years

Present Value = Future value / ( 1 + rate of return )^number of year

Present Value = $6,750 / ( 1 + 3.75% )^5

Present Value = $6,750 / ( 1 + 0.0375 )^5

Present Value = $6,750 / ( 1.0375 )^5

Present Value = $6,750 / 1.2021

Present Value = $5,615.17

Present Value of security is $5,615