compound interest

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dmillionaire

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Sep 15, 2013
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hey fmh, i need some help on this questions

"What amount, 1.5 years from now, is equivalent to $8500 due in 8 years if money can earn 6% compounded semiannually?"

i really dont know where to start , thinking u might have to use the formula fv=8500 ( 1 + .03)^16

got .03 by doing 6% / 2 (semiannually)

and ^16 by doing 2 (semiannually) x 8 (years)

if someone can help me get started even that be great!
 
dmillionaire said:
hey fmh, i need some help on this questions

"What amount, 1.5 years from now, is equivalent to $8500 due in 8 years if money can earn 6% compounded semiannually?"

i really dont know where to start , thinking u might have to use the formula fv=8500 ( 1 + .03)^16

got .03 by doing 6% / 2 (semiannually)

and ^16 by doing 2 (semiannually) x 8 (years)

if someone can help me get started even that be great!
Click to expand...

The way I read the problem:

A = 8500 * ( 1 + .03)^(-16)

B = A * ( 1 + .03)^3
 
dmillionaire said:
hey fmh, i need some help on this questions

"What amount, 1.5 years from now, is equivalent to $8500 due in 8 years if money can earn 6% compounded semiannually?"

i really dont know where to start , thinking u might have to use the formula fv=8500 ( 1 + .03)^16

got .03 by doing 6% / 2 (semiannually)

and ^16 by doing 2 (semiannually) x 8 (years)

if someone can help me get started even that be great!
Click to expand...
The dangerous thing about formulas is that they give correct numerical results only if you know when to apply them.

There are two ways to think about this problem. The long way but perhaps intuitive way is this.

Let x = the present value of 8500 payable in 8 years an opportunity cost of 6% p.a. compounded semi-annually.

Let y = the future value of x in 1.5 years given an opportunity cost of 6% p. a. compounded semi-annually.

Now there is a short-cut, but it implies an economic assumption.

Let z = the present value after 1.5 years of an amount that would be due 6.5 years even later if the expected opportunity cost after 1.5 years is 6% p.a. compounded semi-annually.

Mathematically, z = y, but it involves the economic assumption that future opportunity costs will equal current opportunity costs.
 
Last edited:
JeffM said:
Let x = the present value of 8500 payable in 8 years an opportunity cost of >> 8% << [p.a. compounded semi-annually.

Let y = the future value of x in 1.5 years given an opportunity cost of > > 8% < < p. a. compounded semi-annually.



Let z = the present value after 1.5 years of an amount that would be due 6.5 years even later if the expected opportunity cost
after 1.5 years is >> 8% << p.a. compounded semi-annually.
Click to expand...

Did you intend "6%" in those places?
 
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