Question

You are scheduled to receive $100 in one year. If the interest rate increases, what will happen to the present value of this cash flow?

Answer 1

Answer:

The present value decreases

Explanation:

The present value of an amount of $100 to be received in one year, at an interest rate 'r', is:

$PV=\frac{\ 100}{(1+r)}$

As we can see, since the interest rate is in the denominator of the expression, if 'r' increases, then the present value decreases.

I.e. If the interest rate were zero, then $100 would buy the same amount of goods today as it would in one year, however, if the interest rate is positive, $100 today would buy more goods than it would in one year.