Question

To cleara debt, a person agrees to pay Rs.1,000 now, another Rs.1,000 a year from now and another Rs.1,000 of these payments? in two years. If the future payments are discounted at 8% compounded quarterly, what is the present value​

Answer 1

Step-by-step explanation:

For example, Rs. 10,000 is invested in a fixed deposit for 10 years. The interest is compounded every quarter which means 4 times in a year. The interest paid by the bank is 5%. To find out your nominal rate of interest, you need to divide 5 by 100 which equals 0.05. Now, we look at the formula and substitute the letters with the relevant numbers.

Calculating the Total Value of the Deposit

P (1+ i/n)nt

Step 1: 10,000 (1+0.05/4)4x10

Step 2: 10,000(1+0.0125)40

Step 3: 10,000 (1.0125)40

Step 4: 10,000 (1.64361946349)

Step 5: 16436.1946349

We can round of this total to Rs. 16,436.19. So the compound interest earned after 10 years is Rs. 6,436.19.

Calculating the Interest Earned

We can also arrive at this figure using the formula for compound interest earned. We can substitute the numbers for letters as seen below:

P[(1+ i/n)nt -1]

Step 1: 10,000 [(1+0.05/4)4x10 -1]

Step 2: 10,000 [(1+0.0125)40-1]

Step 3: 10,000 [(1.0125)40-1]

Step 4: 10,000 [(1.64361946349) -1]

Step 5: 10,000 (0.664361946349

Step 5: 6436.1946349

We can now add this interest earned to the principal amount to find out the value of