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

Isai Le

5 December, 08:00

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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Leandro Bradley · 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.