Question

Which of the following statements are correct?

I. All else equal, the present value increases as the interest rate decreases.
II. All else equal, the future value decreases as the period of time increases.
III. All else equal, the interest rate increases as the time period decreases.
A) I only
B) II only
C) I and II only
D) I and III only
E) III only

Answer 1

All three statements are correct: present value increases as interest rate decreases, future value decreases as time period increases, and interest rate increases as time period decreases.

Step-by-step explanation:

All three statements are correct.

I. When all else is equal, the present value increases as the interest rate decreases. This is because a lower interest rate means that the future cash flows are discounted at a lower rate, resulting in a higher present value.

II. When all else is equal, the future value decreases as the period of time increases. This is because the longer the time period, the more time there is for the interest to compound, resulting in a lower future value.

III. When all else is equal, the interest rate increases as the time period decreases. This is because a shorter time period means there is less time for the interest to compound, resulting in a higher interest rate.