The question is, “What is the present value for the future value of $500 at 5% compounded quarterly for 2 years? I am not sure what formula to use and I tried this and I got a different answer then the back of the book. Can someone show me step by step?
Thanks!
Valithor
July 11, 2010 at 4:51 am
If you wish to have $500 in 2 years time (the future value), then the “present value” of this amount will be the value that is required to be invested now at 5% compounding quarterly so that it will reach $500 in 2 years time.
You need to use the compound interest formula:
A = P(1 + r)^n
where A is the final amount, P is the present value, r is the interest rate per period, and n is the number of periods.
For this question:
500 = P(1 + 0.05/4)^8
500 = P(1.0125)^8
500 = 1.1045P
P = 452.70
You will need to invest $452.70 (the present value) in order to have a future value of $500.