Canadian Securities Course (CSC) Level 1 Practice Exam

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Describe how to find the PV of the principal.

Use the formula PV = FV * (1 + r)^n
Convert the future value into a percentage
Minus the interest rate from the future value
Use the PV formula PV = FV/ (1+r)^n. r is equal to the discount rate per period. n is Equal to the number of payments to maturity. FV is equal to the principal received at maturity.

The correct answer is: Use the PV formula PV = FV/ (1+r)^n. r is equal to the discount rate per period. n is Equal to the number of payments to maturity. FV is equal to the principal received at maturity.

The correct approach to find the present value (PV) of a principal amount involves discounting the future value (FV), reflecting the time value of money. Using the formula PV = FV / (1 + r)^n properly captures this concept, where the future cash flow is divided by the factor (1 + r)^n. In this formula, "r" represents the discount rate per period, and "n" indicates the number of periods until the payment is received. This method effectively recognizes that a dollar today is worth more than a dollar in the future due to the opportunity to earn interest on that dollar. This correct formula applies to any situation where you want to determine the worth of future cash flows in today's monetary terms. Thus, understanding this formula is crucial for various financial calculations, including investments and loan assessments.