A debt of $2000 due in one year is to be repaid by a payment due two years from now and a final payment of $1000 three years from now.If the interest is at the rate of 4% compounded annually,then the payment due in two years is
A) $1000.00.
B) $1118.46.
C) $1155.43.
D) $1191.00.
E) $1203.14.

Question

Quizplus · Accepted Answer

We can use the time value of money formulas to solve the problem. Let X be the payment due in two years. Then we have:

X/(1+0.04) + 1000/(1+0.04)^2 = 2000/(1+0.04)^3

Solving for X, we get:

X = 2000/(1+0.04)^3 - 1000/(1+0.04)^2 = $1118.46 (rounded to the nearest cent)

A Debt of $2000 Due in One Year Is to Be