With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximatelyA) $1,000.B) $2,000.C) $2,560.D) $3,000.
B) $2,000
We can use the present value formula to solve this problem:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.
For the first cash flow of $1,100 next year, n=1. Using a 10 percent interest rate, we get:
PV1 = 1,100 / (1 + 0.1)^1
PV1 = 1,000
For the second cash flow of $1,460 four years from now, n=4. Using a 10 percent interest rate, we get:
PV2 = 1,460 / (1 + 0.1)^4
PV2 = 1,000
To find the total present value, we can add up the present values of each cash flow:
PV = PV1 + PV2
PV = 1,000 + 1,000
PV = 2,000
Therefore, the answer is (B) $2,000.
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