The price of perpetuities decrease with increasing interest (discount) rates. T/F

Expert Solution

Answer: T

This is true.

An example is taken below:

Suppose the future value (F) is $1,500. If the rate is gone up from 10% to 12%, the present value or price would be as below:

Price (at 10% rate) = F/10% = 1,500/0.10 = $15,000

Price (at 12% rate) = F/12% = 1,500/0.12 = $12,500 (decreases)

Therefore, at an increasing rate the price should decrease.

jeff jeffy answered 2 years ago

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