Your grandmother has promised you $1,000 when you graduate in one year. At a 6% annual interest rate, you can borrow _____ and pay it back with your grandmother's gift at graduation.

Question

Quizplus · Accepted Answer

We want to find the present value of the $1,000 gift so we can borrow that amount now and pay it back later. Using the formula for present value of a future sum with compound interest, we get:
Present value = Future value / (1 + r)^n
where r is the annual interest rate and n is the number of periods (in this case, one year).
Plugging in the values, we get:
Present value = $1,000 / (1 + 0.06)^1
Present value = $943.40
Therefore, borrowing $943.40 now and paying it back with the $1,000 gift at graduation would be the best choice.

Your Grandmother Has Promised You $1,000 When You Graduate in One