Question

What is the present value of CD with 4% annual interest that matures in 1 year with the value of $3000? What is the future value? What factor would determine which value you chose to use?

Answer 1

Solution:

We are given;

Annual interest rate (i) = 4% = 0.04

Time (t) = 1 year

Value after 1 year = $3000

We calculate the present value (PV) using by discounting back the value of the money invested

after a year (FV after a year). I.e.,

PV = FV (1 + i) ^(-t)

Here FV is the value of the CD after 1 year, which is $3,000

Thus,

PV = $3000 (1+ 0.04)^(-1)

= $$\frac{3000}{1.04}$

= $2,884.62

The present value is of CD is $2,884.62

Present value will determine what is the current price of the CD and the future value will determine the amount of the CD as time goes by.