Riley says that the present value of $700 one year from today if the interest rate is 6 percent isless than the present value of $700 two years from today if the interest rate is 3 percent. Anh saysthat $700 saved for one year at 6 percent interest has a smaller future value than $700 saved fortwo years at 3 percent interest. a. Both Riley and Anh are correct. b. Both Riley and Anh are incorrect. c. Only Riley is correct. d. Only Anh is correct.

Question

Business

Jimena Maynard

30 November, 06:01

Riley says that the present value of $700 one year from today if the interest rate is 6 percent isless than the present value of $700 two years from today if the interest rate is 3 percent. Anh saysthat $700 saved for one year at 6 percent interest has a smaller future value than $700 saved fortwo years at 3 percent interest. a. Both Riley and Anh are correct. b. Both Riley and Anh are incorrect. c. Only Riley is correct. d. Only Anh is correct.

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Answers (1)

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Silvester · Answer 1

A) Both Riley and Anh are correct.

Explanation:

to see who is right we can calculate:

PV = FV / (1 + r) ⁿ

FV = PV x (1 + r) ⁿ

Riley's statement:

PV = $700 / (1 + 6%) = $660.38

PV = $700 / (1 + 3%) ² = $659.82

Riley is right

Anh's statement:

FV = $700 x (1 + 6%) = $742

FV = $700 x (1 + 3%) ² = $742.63

Anh is right

They are both right due to compound interest, since compound interest means that the interest earned will also earn more interest.