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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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  1. 5 December, 09:49
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    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.
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