Finding a present value is the reverse of finding a future value. is the process
ID: 2812087 • Letter: F
Question
Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $14,000 in six years will have a higher price today? The security that earns an interest rate of 4.00%. The security that earns an interest rate of 6.00%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? An investment that matures in six years An investment that matures in seven years Which of the following is true about present value calculations? Other things remaining equal, the present value of a future cash flow increases if the investment time perioc increases. Other things remaining equal, the present value of a future cash flow decreases if the investment time period increasesExplanation / Answer
Answer a.
Discounting is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
Answer b.
Payment in 6 years = $14,000
Option 1:
Present Value = $14,000/1.04^6
Present Value = $11,064.40
Option 2:
Present Value = $14,000/1.06^6
Present Value = $9,869.45
So, the security that earns an interest rate of 4.00% will have a higher price today.
Answer c.
Payment = $1,000
Interest rate = 9.60%
Option 1:
Present Value = $1,000/1.096^6
Present Value = $576.95
Option 2:
Present Value = $1,000/1.096^7
Present Value = $526.41
So, an investment that matures in seven years will exhibit the lower price.
Answer d.
Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
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