Question

Which one of the following is true? Interest rates and time are positively related, all else held constant. Perpetuities are finite but annuities are not. An increase in time increases the future value given a zero rate of interest. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. Time and present value are inversely related, all else held constant.

Answer 1

Time and present value are inversely related, all else held constant

Step-by-step explanation:

For any future stream of payments, say deferred annuity or annuity due, time is the deciding factor. The greater the time span, the lesser would be the present value of a future receipt.

For instance, if $10,000 is to be received 2 year hence and in another case $10,000 is to be received 5 years hence. The present value of receipts after 5 years would be lesser than the present value of receipts of 2 years hence.

This is because as time progresses, the same money owing to inflation, gradually loosens it's purchasing power. So $100 received today would be always better than same amount received an year hence.