Riley says that the present value of $700 one year from today if the interest rate is 6 percent isless than the present value of $700 two years from today if the interest rate is 3 percent. Anh saysthat $700 saved for one year at 6 percent interest has a smaller future value than $700 saved fortwo years at 3 percent interest.a. Both Riley and Anh are correct.b. Both Riley and Anh are incorrect.c. Only Riley is correct.d. Only Anh is correct.
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Question:
Riley says that the present value of $700 one year from today if the interest rate is 6 percent isless than the present value of $700 two years from today if the interest rate is 3 percent. Anh saysthat $700 saved for one year at 6 percent interest has a smaller future value than $700 saved fortwo years at 3 percent interest.a. Both Riley and Anh are correct.b. Both Riley and Anh are incorrect.c. Only Riley is correct.d. Only Anh is correct.
Answers
Answer:A) Both Riley and Anh are correct.Explanation:to see who is right we can calculate:PV = FV / (1 + r)ⁿFV = PV x (1 + r)ⁿRiley's statement:PV = $700 / (1 + 6%) = $660.38PV = $700 / (1 + 3%)² = $659.82Riley is rightAnh's statement:FV = $700 x (1 + 6%) = $742FV = $700 x (1 + 3%)² = $742.63Anh is rightThey are both right due to compound interest, since compound interest means that the interest earned will also earn more interest.
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