Consider a three-year fixed-payment security that has a present value of $1,000.If the annual rate of discount is 7 percent, the payment made at the end of each year is
A)$70.00.
B)$107.00.
C)$142.86.
D)$381.05.

Question

Quizplus · Accepted Answer

The payment made at the end of each year can be found using the formula for the present value of an annuity: $PV = PMT \times \left[\frac{1 - (1 + r)^{-n}}{r}\right]$, where PV is the present value ($1,000), PMT is the annual payment, r is the annual discount rate (0.07), and n is the number of periods (3 years). Rearranging the formula to solve for PMT gives $PMT = \frac{PV}{\left[\frac{1 - (1 + r)^{-n}}{r}\right]}$. Substituting the given values and solving for PMT yields approximately $381.05.

Consider a Three-Year Fixed-Payment Security That Has a Present Value