Question

Suppose you will receive a payment of $300 one year from now. True or False: If during the year the interest rate rises, this increases the present value of your future payment.

Answer 1

Answer: False

Step-by-step explanation:

When interest rates rise, the present value of a payment will be reduced because it will be discounted by a higher rate.

For instance; assume the interest rate was originally 10%. The present value of the $300 would be;

= 300 / ( 1 + 10%)

= $273

Now assume the interest rate went up to 11%. Present value would be;

= 300 / ( 1 + 11%)

= $270

Notice that the present value fell when the interest rate rose.