What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?
A) $2,000/1.06
B) $1000/1.06)2
C) $1000/1 + 0.062)
D) None of the above are correct.

Question

Quizplus · Accepted Answer

To calculate the present value of a future payment, we need to discount it by the interest rate. Using the formula PV = FV / (1 + r)n, where PV is present value, FV is future value, r is the interest rate, and n is the number of years, we get:
PV = $1000 / (1 + 0.06)2
PV = $1000 / 1.1236
PV ≈ $890.99
Therefore, the best choice is B, which represents $1000 divided by (1.06)2, the correct calculation for the present value.

What Is the Present Value of a Payment of $1,000