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5 August, 08:41

It is now January 1, 2015; and you will need $1,000 on January 1, 2019, in 4 years. Your bank compounds interest at an 8% annual rate. How much must you deposit today to have a balance of $1,000 on January 1, 2019? The formula method for this questions is

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Answers (2)
  1. 5 August, 08:46
    0
    Pv = $1000 (1.08) ^-4

    Explanation:

    Compounding is the computation of the future value of $1 invested today while discounting is the determination of the present worth of $1 in the future. Both are related by the equation

    Fv = Pv (1 + r) ^n

    where Fv = Future amount

    Pv = Present value

    r = rate of return

    n = time in years

    Hence the formula required

    $1000 = Pv (1 + 0.08) ^4

    Pv = $1000 (1.08) ^-4
  2. 5 August, 08:52
    0
    You need to deposit $735.03 today

    Explanation:

    Future Value (FV) : $1,000

    Rate: 8% pa

    Tenor: 4 years

    Present value is the amount of deposit today?

    FV = PV * (1 + rate) ^ tenor

    ⇔ 1000 = PV * (1+8%) ^4

    ⇒ PV = 1000 / (1+8%) ^4 = $735.03
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