NAME: Mukuna Harrison Ohoko

STUDENT NO: s167454

COURSE UNIT: Personal Finance (Unit 3)

COURSE CODE: BUSS 2204

TASK: Learning Journal

INSTRUCTOR: Stephen Dimarco

QUESTION THREE

What is the present value of CD with 4% annual interest that matures in 1 year with a
value of $3000? If you had $3,000 right now, with the same rates for the same amount of
time, can you calculate its future value? What factor would determine which value you
chose to use?

Answer

This week, we were introduced to two very important concepts thus future value and present
value. The present value (PV) is a very important concept because it is used to set prices in all
financial markets. To calculate the present value, we need to know the formula which is

PV x (1+r) t = FV

From this formula, r is our annual interest rate (4%), t is the time interval (1 year), and our par or
future value is $3000. To calculate for the present value, we have to make PV the subject from
this equation. When divide both side of the equation by (1+r) t and substituting the value of r and
t,

PV = 3000/1.04 = 2884.62

Therefore, the present value of CD with 4% annual interest that matures in 1 year with the value
of $3000 is $ 2884.62 (in two decimal places).

The future value is $ 3000.

I think time, risk, and opportunity cost are all factors that would determine which value I chose
to use because r (discount rate) is counted by time meaning there is a risk of rate increment
which reduces my present value. If the CD is to be bought or sold today, then its present value as
it is the price of the CD today. However, if the CD is be held until its maturity date, then future
value will be used as it is the value at which the CD will be redeemed.

Reference

Siegal, R. & Yacht, C. (2009). Personal Finance. Saylor Foundation. Licensed under Creative
Commons CC BY-NC-SA 3.0.