Question

Consider the future value of $1 in 10 periods when the interest rate is 5%. When the interest rate doubles to 10%, the future value: Increases but by less than double Exactly doubles Increases by more than double Cannot be determined a

Answer 1

Answer: Increases but by less than double

Step-by-step explanation:

The formula for future value will be calculated as:

FV = PV (1 + r )^n

When interest rate = 5%, then the future value will be:

= 1 × (1 + 5%)^10

= 1 × (1 + 0.05)^10

= 1 × (1.05)^10

= 1.63

When Interest rate is 10%, then the future value will be:

= 1 × (1 + 10%)^10

= 1 × (1 + 0.10)^10

= 1 × (1.10)^10

= 2.59

Therefore, the answer is "Increases but by less than double"