5 interest rate for 10 years 10510 x 100163 To compute a present value from a

# 5 interest rate for 10 years 10510 x 100163 to

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5% interest rate for 10 years: (1.05)^10 x \$100=\$163 To compute a present value from a future value (how much you have to deposit in a bank to yield \$200 in N years) you divide by the factor (1+r)^N Interst rate=5%, present value of \$200 to be paid in 10 years= \$200/ (1.05)^10=\$123 If r is the interest rate, then an amount X is to be received in N years has a present value of X/1+r)^N Process of finding a present value of a future sum of money is called discounting The higher the interest rate, the more you can earn by depositing your money in a bank Concept of present value helps explain why investment—and thus the quantity of loanable funds demanded—declines when the interest rate rises \$15 million for 14 years or \$25 million for 6 years (paid each years)

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• Spring '13
• CarolRogers

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