What is compounding? What is discounting? Take a look back at Example 5.7. Is it deceptive advertising? Is it unethical to advertise a future value like this without a disclaimer? Briefly explan your answer.

EXAMPLE 5.7

Deceptive Advertising?

Businesses sometimes advertise that you should Come try our product. If you do, well give you $100 just for coming by! If you read the fine print, what you find out is that they will give you a savings certificate that will pay you $100 in 25 years or so. If the going interest rate on such certificates is 10 percent per year, how much are they really giving you today?

What youre actually getting is the present value of $100 to be paid in 25 years. If the discount rate is 10 percent per year, then the discount factor is:

1/1.1²⁵ = 1/10.8347 = .0923

This tells you that a dollar in 25 years is worth a little more than nine cents today, assuming a 10 percent discount rate. Given this, the promotion is actually paying you about .0923 $100 = $9.23. Maybe this is enough to draw customers, but its not $100.