question archive Assume the same data as in Appendix 1 Exercise 12-19, except that the current interest rate is 13%
Assume the same data as in Appendix 1 Exercise 12-19, except that the current interest rate is 13%
Subject:FinancePrice:2.88 Bought3
Assume the same data as in Appendix 1 Exercise 12-19, except that the current interest rate is 13%.
Will the present value of your winnings using an interest rate of 13% be one half the present value of your winnings using an interest rate of 6.5%? Why or why not?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
No. The present value of your winnings using an interest rate of 13% is $59,688,640 ($11,000,000 × 5.42624), which is more than one-half of the present value of your winnings using an interest rate of 6.5% ($79,077,130; see Appendix 1 Ex. 12-19). This is because of the effect of compounding the interest. That is, compound interest functions are not linear functions, but use exponents.
