Your parents have informed you that they plan to reward you for your academic achievements with $10,000 when you graduate next year. The risk-free rate is 4%, and the expected return
On the market is 9%, with a standard deviation of 18%. What is the present value of this gift if
You assume that your future cash flow is independent of the return on the market? Round
Your answer to the nearest dollar.

Question

Quizplus · Accepted Answer

The present value (PV) of the gift can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($10,000), r is the risk-free rate (4% or 0.04), and n is the number of periods (1 year). Plugging in the values, we get PV = $10,000 / (1 + 0.04)^1 = $10,000 / 1.04 = $9,615.38, which rounds to $9,615. The fact that the future cash flow is independent of the return on the market means that the market's expected return and standard deviation are irrelevant to this calculation.

Your Parents Have Informed You That They Plan to Reward