Classify the finacial problem. Assume a 7% interest rate compounded annually. Find the value of a $ 1,000 certificate in 4 years. a) sinking fund, b) ordinary annuity, c) future value, d) present value e) amortization.
Classify the finacial problem. Assume a 7% interest rate compounded annually. Find the value of a $ 1,000 certificate in 4 years. a) sinking fund, b) ordinary annuity, c) future value, d) present value e) amortization.
To determine the classification of the financial problem, we need to understand the terms that are given and their implications.
a) Sinking fund: A sinking fund is a fund set up to accumulate money over time to meet a future obligation or expense. It involves periodically depositing money into the fund to reach a specified target amount.
b) Ordinary annuity: An ordinary annuity involves a series of equal cash flows or payments made at the end of each period. These cash flows can be deposits into an account or payments received from a financial instrument.
c) Future value: The future value represents the value of an investment or a sum of money at a specified date in the future. It reflects the growth or compounding of the initial amount.
d) Present value: The present value refers to the current worth of a future amount of money, taking into account the time value of money. It is the amount that should be invested currently to reach a desired or expected future value.
e) Amortization: Amortization refers to the process of gradually reducing or paying off a debt with regular payments over a specific period. Each payment typically consists of both principal repayment and interest payment.
Now, let's analyze the given problem. We are asked to find the value of a $1,000 certificate in 4 years with a 7% interest rate compounded annually.
Since we need to find the future value (the value of the certificate in the future), the correct classification for this problem is:
c) Future value.
To calculate the future value of the $1,000 certificate in 4 years with a 7% interest rate compounded annually, we can use the formula for compound interest:
Future Value = Present Value * (1 + Interest Rate)^Number of Periods
Plugging in the given values:
Future Value = $1,000 * (1 + 0.07)^4
Calculating this equation will give us the value of the $1,000 certificate in 4 years, which is the future value.