Show your calculations and answer the following questions
- An investment will pay you $120 in one year and $200 in two years. Calculate the present value of these cash flows if the interest rate is 4%.
-Suppose you invest $1000 in an account paying 6% interest per year. What is the balance in the account after 3 years? Calculate how much of this balance corresponds to “interest on interest”
- If Brandon receives 6 percent interest rate on his bank account and the inflation rate is 4 percent. Calculate the real interest rate will he earn.
Payment in one year = $120
Payment in two years = $200
Interest rate (r) = 4% or 0.04
Solution :-
Present value = [payment in one year (1 + r)] + [payment in two years (1 + r)2]
= [$120 (1 + 0.04)] + [$200 (1 + 0.04)2]
= [$120 (1.04)] + [$200 (1.04)2]
= $115.384615384 + [$200 1.0816
= $115.384615384 + $184.9112426 = $300.30
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