Final answer:
The future value of an annuity will increase if you increase the time period, but it will decrease with a lower interest rate, present value, or payment amount. Interest rate fluctuations also affect the present value of bonds, with higher interest rates leading to a lower present value and vice versa.the right answer is 5)
Step-by-step explanation:
The student's question revolves around the factors that affect the future value of an annuity. An annuity is a series of payments made at regular intervals, and its future value is influenced by variables such as the interest rate, time period, present value, and payment amount.
Contrary to the options provided, if you increase the time period while keeping other factors constant, the future value of an annuity will increase because there will be more periods for the interest to be compounded. A decrease in the present value or payment amount would reduce the future value of the annuity, and a decrease in the interest rate would also typically lead to a decrease in the future value, as there's less interest being compounded over time.
In the context of bonds, if interest rates rise after a bond is issued, the present value of future payments discounted at this higher rate becomes lower, thus reducing the investment's value if sold. Conversely, if interest rates fall, the bond's value increases due to a locked-in higher rate.
Moreover, the opportunity cost must be considered when interest rates change after purchasing a bond; the bondholder could miss out on higher payments from new bonds issued at the current higher rates.