Question

2. How interest rate changes affect present and future value Suppose you deposit $300 today into a bank account with a variable interest rate and will receive a payment in one year. True or False: If during the year the interest rate rises, this increases the future value of your investment.

Answer 1

The statement is true.

Step-by-step explanation:

In order to compute the interest rate, the formula which is used is:

F = P × (1 + i) ^ t

Where

F is future value

P is Principal

i is interest rate

t is number of years

So, Future value is directly related to the interest rate, which means that increase in interest rate means more future value and decrease in interest rate means less future value.

Therefore, statement is true as it is directly related.