A lender is promised a $100 payment (including interest) one year from today. If the lender has a...

Question:

A lender is promised a $100 payment (including interest) one year from today. If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount of money today?

a. $100.00

b. $106.20

c. $96.40

d. $94.34

A saver knows that if she put $94 in the bank today she will receive $100 from the bank 1 year from now, including the interest she will earn. What is the interest rate she is earning?

a. 5.10%

b. 6.00%

c. 5.52%

d. 5.26%

Compound Interest:

Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan

Answer and Explanation:

1. A= 100, r= 6%, t=1, P=?

{eq}P= \frac{A}{{(1+r)}^t} {/eq}

{eq}P= \frac{100}{{(1+0.06)}^1} {/eq}= $94.34

P= $94.34

2. A= 100, r= ?, t=1, P=94

{eq}r= 1\times [(\frac{A}{P})^{1/rt} - 1] {/eq}

{eq}r= 1\times [(\frac{100}{94})^{1/r} - 1] {/eq}= 0.06383=6.383%

Rate= 6.383%


Learn more about this topic:

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What is Compound Interest? - Definition, Formula & Examples

from High School Algebra I: Help and Review

Chapter 23 / Lesson 16
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