Question
Asked Mar 9, 2019
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Find the principal needed now to get the given amount; that is, find the present value. To get $800 after 2 years at 6% compounded monthly:
 
The present value of $800 is?

 

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Expert Answer

Step 1

Compound interest:

In compound interest, interest is added back to the principal sum so that interest is earned on that added during the next compounding period. That is, compound interest will give an interest on the interest. The interest payments will change in the time period in which the initial sum of money stays in the bank or with the barrower.

The general formula for compound interest is,

A = P * (1 + r/n)nt

Where:

A is the future value of the investment loan including the loan,

P is the principle amount,

r is the annual interest rate in decimals,

n is the number of times interest is compounded per year,

t is the time of years the money is invested or borrowed.

Step 2

Find the principal amount needed to get $800 after 2 years at 6% interest compounded monthly:

The future value of the investment loan including the loan is $800 at 6% compound monthly interest after 2 years.

The aim is to know the principal amount needed to get the given amount.

Here,

The future value of the investment loan including the loan is A = $800,

Annual interest rate is r = 6% = 0.06,

Th...

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