Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (C
ID: 2740325 • Letter: S
Question
Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 7% interest, compounded annually. How much will you have when the CD matures? $3, 934.30 $3, 186.79 $3, 422.84 $3, 816.27 $4, 642.48 The Lions just signed their quarterback to a 10-year $50 million contract. Is this contract really worth $50 million? (Assume the discount rate is greater than zero) Yes, because the payments over time add up to $50 million. No, it is worth more because he can invest the money. No, it would only be worth $50 million if it were all paid out today. Yes, because his agent told him so.Explanation / Answer
1) Answer (A) $3934.30
Calculation of future value :
Future value = P(1+r)power to no.of years
= 2000 (1+0.07)power to 10
= 2000 * 1.96715
= $3934.30
2) Answer (C) No,it would only be worth $50 million if it were all paid out today
Explanation : It was just given that the lions just signed the contract but there is no clarity whether they will receive money now or later.So that i just have selected the fair option compared to all the other three options.1st one is totally wrong because it didnt consider the time value of money technique and 4th one is with out any logic and 2nd one says he can invest money but the time value technique will make it to present value of $50million always.
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