The Present Value of $100 received in two years is the amount which must be invested today to receive $100 in two years. To the left we show how one can compute this for interest rate r. You should recognize the quantity within the () as the amount one would receive after investing PV for one year at interest rate r

    Because interest is compounded, for the second year you would earn interest on PV(1 + r). After two years PV invested at interest rate r yields PV(1 + r)2. So, the PV of $100 received 2 periods from now is $100 divided by (1 + r)2.

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