Chris buys a note from a municipality that promises to pay $1,500 at the end of each of 3 years.How much should Chris pay for the note if she desires a rate of return of 8%,compounded annually?
A)$4,000
B)$3,866
C)$3,905
D)$3,950
E)$3,750

Question

Quizplus · Accepted Answer

To calculate the present value of the note, we need to use the formula:

PV = FV / (1 + r)^n

Where: 
PV = Present Value 
FV = Future Value 
r = Rate of return 
n = Number of years

Plugging in the values we know: 
FV = $1,500 for each of 3 years = $4,500 
r = 8% 
n = 3

PV = $4,500 / (1 + 0.08)^3 
PV = $3,866

Therefore, Chris should pay $3,866 for the note if she desires a rate of return of 8% compounded annually.

The other options can be eliminated as they are either too high or too low for the present value of the note.

Chris Buys a Note from a Municipality That Promises to Pay