Question

As the discount rate decreases (including negative values), the present value of a given positive cash flow to be received at a particular time in the future:_________
a. gets closer to zero
b. gets larger without limit
c. stays unchanged
d. gets smaller without limit

Answer 1

Answer:

C, gets larger without limit.

Explanation:

A decrease in discount rate ensures that financial institutions can borrow money at a cheaper rate. Since the lending rate of banks are decreased, the amount of available loans/credit is increased which in turn increases the lending activity of the financial institutions.

Simply put, a discount in rates of funds borrowed by a financial institution helps to increase the reserves of the institution as well as increase the supply of money in the economy.

From the question, a larger cash flow rate is obtainable from a decreased discount rates.

Cheers.