Suppose an investor is promised $1,200 one year from today with a promised interest rate of 18 percent. Then the present value of the $1,200 must be $1,010.

Question

Quizplus · Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($1,200), r is the interest rate (0.18), and n is the number of periods (1 year). Plugging in the values gives PV = $1,200 / (1 + 0.18)^1 = $1,200 / 1.18 ≈ $1,016.95, not $1,010.

Suppose an Investor Is Promised $1,200 One Year from Today