Problema Solution
Suppose you wish to have $16,500 in 2 years. Use the present value formula to find how much you should invest now at 8% interest, compounded semiannually in order to have $16,500, 2 years from now. Then calculate the amount of interest.
Answer provided by our tutors
The Present Value formula states:
PV=C/(1+r)^n
Where:
'PV' is the present value (the amount we are solving for)
C is the final value ($16,500)
r is the rate of return (.08)
n is the number of periods. Since it is compounded semiannually (twice a year) over 2 years, n would be 4 in this case
Plugging in our numbers we get:
PV=($16,500)/(1+.08)^4
PV=$12,127.99 (This is how much you should invest now)
Therefore, the amount of interest is
$16,500-$12,127.99=$4372.01