Question

If the interest rate is 15%, what is the present value of a security that pays you \(1,100 next year, \)1,250 the year after, and $1,347 the year after that?

Short answer

The present value is $2787.38

Step-by-step solution

Step 1. Introduction

An interest rate indicates how much it costs to borrow money or how much it pays to save money. So, if you're a borrower, the interest rate is the cost of borrowing money expressed as a percentage of the entire loan amount.

Step 2. Explanation

$$\begin{gathered} ThePresentValueofSecurity=\frac{1100}{(1+0.15)}+\frac{1250}{(1+0.15)^2}+\frac{1347}{(1+0.15)^3} \\ =\$2787.38 \end{gathered}$$