Suppose you receive a $1,000 gift today. If the interest rate is 7% per year, th

Question

Suppose you receive a $1,000 gift today. If the interest rate is 7% per year, the future value of the gift one year from today will be ________ . (For simplicity, assume throughout this problem that payments are made at the end of each year.) Again, suppose you receive a $1,000 gift today. If the interest rate is 7% per year, the future value of the gift two years from today will be (rounded to the nearest dollar) _______ . If the interest rate is 7% per year, the present value of a $1,000 gift that you will receive one year from today (rounded to the nearest dollar) is _______ . Again, if the interest rate is 7% per year, the present value of a $1,000 gift that arrives two years from today (rounded to the nearest dollar) is _______ .

Explanation / Answer

a) interest amount after 1 year = 1000 * 0.07 * 1 = 70

Therefore, future value of the gift will be = 1000 + 70 = 1070 dollars

b)  interest amount after 2 year = 1000 * 0.07 * 2 = 140

Therefore, future value of the gift will be = 1000 + 140 = 1140 dollars

c) let P be the present value of a gift

after 1 year, value of gift = 1000

p + (p*0.07*1) = 1000

1.07p = 1000

Therefore, p = 934.579 dollars

d)

let P be the present value of a gift

after 2 years, value of gift = 1000

p + (p*0.07*2) = 1000

1.14p = 1000

Therefore, p = 877.193 dollars

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