Question

Assume that you must make a $1,000 payment one year from today. how much must you deposit today in a bank account that pays a 6% nominal rate, monthly compounding, to have the needed funds a year from now?

a. $1,060.13
b. $ 941.91
c. $ 999.27
d. $ 970.17
e. $1,029.25

Answer 1

Future value 1000 a year from now. We are expected to pay about 6% less today to get the future value.
So the answer should be around $940, which makes an easy choice.

However, to make sure, we use the compound interest formula:
F=P(1+i)^n
where i=6%/12=0.005 [monthly interest]
n=1year * 12 months / year = 12 months

1000=P(1.005)^12
=>
P=1000/1.005^12=$941.91 is what needs to be deposited today.