Suppose the interest rate is 4.4 %4.4%. a. Having $ 650$650 today is equivalent to having what amount in one year? b. Having $ 650$650 in one year is equivalent to having what amount today? c. Which would you prefer, $ 650$650 today or $ 650$650 in one year? Does your answer depend on when you need the money? Why or why not?
Question
Suppose the interest rate is 4.4 %4.4%. a. Having 650 today is equivalent to having what amount in one year? b. Having 650 in one year is equivalent to having what amount today? c. Which would you prefer, 650 today or 650 in one year? Does your answer depend on when you need the money? Why or why not?
Solution
a. To find out how much $650 will be worth in one year with an interest rate of 4.4%, you would use the formula for compound interest, which is A = P(1 + r/n)^(nt). In this case, r (the annual interest rate) is 4.4% or 0.044, n (the number of times that interest is compounded per unit t) is 1 since it's compounded annually, and t (the time the money is invested or borrowed for in years) is 1.
So, A = 650 * 1.044 = $678.60.
So, having 678.60 in one year.
b. To find out how much 650, r is 0.044, n is 1, and t is 1.
So, PV = 650 / 1.044 = $622.80.
So, having 622.80 today.
c. Whether you would prefer 650 in one year depends on when you need the money. If you need the money now, then obviously you would prefer 650 in one year, because due to the interest rate, that 678.60). So, if you don't need the money now, it makes more financial sense to wait and take the $650 in one year.
Similar Questions
Why might an individual prefer to receive $1,000 today instead of $1,100 one year from now, given a positive interest rate? (There may be more than one correct answer: select all that apply.)Group of answer choicesBecause receiving money now has no benefits or advantages.Because the individual believes that prices of goods will remain the same over time.Because the present value of the $1,100 in one year might be less than $1,000 today, depending on the interest rate.Because money has more value in the future than it does in the present.Because money that you're paid in the future, rather than the present, comes with the opportunity cost of not being able to gain from the power of compound interest.
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