Question

1. What is the relationship between interest rate (I) and present value (PV)? Are they moving in the same direction, or the opposite direction?
2. Using your answer in part 1 to explain how financial markets react when the Federal Reserve announces interest rate increase (so called "Federal Fund rate"). Will the markets rise or decline? Why do investors/markets react that way?
3. From what we learned in chapter 8, which type of bonds can help wealthy investors to save taxes? Which type of bonds provides protection against inflation?
4. Most of full-time employees in America have an employer sponsored retirement account called 401K. Some people also like to set up their own retirement account so called IRA and Roth IRA. Do some research on the internet to find what is the benefit of each of these three types of retirement account? And which type(s) do you have or plan to have.
5. Given the current US economy, do you think our stock market is strong? Will it continue to rise? Use 4-7 sentences to share your personal opinion.

Answer 1

(1):

There exists an inverse relationship between interest rate (I) and present value (PV). In other words they move in the opposite direction. The higher the interest rates the lower will be the amount of PV and the lower the interest rates the higher will be the amount of PV. This happens because when interest rate changes so does the time value of money changes. For instance when interest rate declines then the value today of future benefits will have to go up so that you get the same amount of future benefits that you currently want and desire.

When Federal Reserve announces interest rate increase then the markets usually decline. This happens because increase in interest rates make borrowing money more expensive and so disposable income of people declines and along with it their spending and consumption. Expansion plans of business entities also slow down as borrowing money becomes expensive for them. So when Federal Reserve announces interest rate increase then the markets usually decline because the value today of future benefits will go down.