Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest.Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent.
A)Braden and Lefty are both correct.
B)Braden and Lefty are both incorrect.
C)Only Braden is correct.
D)Only Lefty is correct.

Question

Quizplus · Accepted Answer

Braden is correct because the formula for future value is FV = PV(1 + r)^t, where PV is the present value, r is the interest rate, and t is the number of years. So, if you plug in the numbers for Braden's scenario, you get FV = 400(1 + 0.04)^1 = $416, and for Lefty's scenario, you get FV = 400(1 + 0.02)^2 = $408.16, which means Braden's investment has a higher future value.
However, Lefty is also correct because the formula for present value is PV = FV/(1 + r)^t, where FV is the future value, r is the interest rate, and t is the number of years. So, if you plug in the numbers for Lefty's scenario, you get PV = 400/(1 + 0.04)^1 = $384.62, and for Braden's scenario, you get PV = 400/(1 + 0.02)^2 = $392.16, which means Lefty's investment has a higher present value.

Braden Says That $400 Saved for One Year at 4