Suppose the interest rate in the first period is expected to be 5% and in the second period it is expected to be 10%. If such were the case what would be the Present Value of $100 to be received in two periods?

    Just like before, we compute this by realizing that the Present Value is simply the amount that would need to be invested now to obtain $100 in 2 periods. After 1 period we would have eared 5% interest on PV and in the second period we would earn 10% interest on PV (1 + .05).

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