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. True False

Answer 1

Answer:

False

Explanation:

When value of money is evaluated over time, the interest rate is put into consideration.

Present value of future cash flows of a loan is an estimate of how much will be paid on a certain amount given a specific interest rate over a period of time.

So if there is a fall in interest rate it means that less of the original amount is being discounted, so present value increases.

On the other hand when interest rate increases more of original amount is discounted. So the present value reduces.

In the given scenario when you receive a payment of $300 one year from now and during the year the interest rate rises, this reduces the present value of your future payment