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A question about Rate of Discount?
Or discount rate, I guess.
Suppose the rate of discount is 5%, 6%, 7%, or 8%. Suppose that you would rather have $425 in one year instead of $400 today. Also, you would rather have $400 today instead of $445 in two years. What is the rate of discount?
a) 5%
b) 6%
c) 7%
or
d) 8%
Best answer to whoever answers correctly and fastest. Thanks in advance.
1 Answer
- Wizened wizardLv 78 years agoFavorite Answer
You prefer 425 in one year instead of 400 today. That means you are happy with a percent gain of 425 - 400 / 400 = 25 / 400 = 6.25%
You don't prefer 445 in two years to 400 today. That gain is 45 / 400 = 11.25% in two years. Because the gain can be considered an annual gain compounded over two years, take the square root of 1.1125 to yield 1.05475 or 5.475% gain each year.
Your preference is between 5.475% and 6.25%. Answer is b) 6%.
Your text has formulas for these.