Question 1172644: Use Table 11-2 to solve the problem.
Solve by using the present value formula. Round your answers (in $) to the nearest cent.
Table 11-2: https://www.webassign.net/brecmbc9/11-table-2.pdf
Compound amount: $12,000
Term of Investment: 8 years
Nominal rate: 4.5%
Interest Compounded: monthly
Present Value: _______
Compound Interest: ________
I need help finding present value and compound interest. I divided the nominal rate and compounded interest which is 12 and got 0.375%. I then multiplied 12 (monthly) into 8 (terms of investment) and got 96. Not sure how to find 0.375 on table 11-2 (link above). Any ideas how to move forward with this one?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! terms of investment is 8 years
nominal rate if 4.5% per year
interest is compounded monthly
you want to find.
present value
compound interest.
the formula is f = p * (1 + r) ^ n
f is the future value
p is the present value
r is the interest rate per time period
n is the number of time periods.
4.5% per year compounded monthly is equal to 4.5/12 = .375%.
you're good there.
the table, unfortunately, does not show .375%.
at the bottom, hower, they tell you that the chart was based on the formula PV = 1 / (1 + r) ^ n.
for example, if r was equal to 1 and 1/2 %, and the number of years was 2, then the number of months would be 24 and the present value factor would be 1 / (1 + .05) ^ 24 = .6995439195.
in the table they say the present value factor for 1.5% for 24 months is .69954.
that's the same number rounded to 5 decimal places.
in other words, the table is generated from the formula i gave you.
the present value factor is 1/(1+r)^n
r is the interest rate per time period, in this case months.
n is the number of time periods, in this case months.
the table cannot be used to solve your problem.
only the formula can.
the reason is that the tables only go to n = 25.
you problem requires n to be 8 * 12 = 96.
you have to use the formula of pv = 1 / (1 + i) ^ n
the i in their formula and the r in my formula mean the same thing.
it's the interest rate per month which is 4.5% / 12 = .375%.
in the formula, you have to use the rate, not the percent.
the rate is .00375 per months.
n is 8 * 12 = 96.
your present value factor becomes 1 / (1 + .00375) ^ 96
this results in the present value factor = .6981462417.
i confirmed with a financial calculator that this is correct.
bottom line.
you won't find .375 on the table because it's not there.
you had to resort to using the formula shown at the bottom of the page.
in that formula, you had to use the interest rate per time period, not the interest rate percent per time period.
any questions, give me a shout.
theo
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