For lump sum payment, an increase of interest rate increases FV and decreases PV. True or...

For lump sum payment, an increase of interest rate increases FV and decreases PV.

True or false?

Solutions

Expert Solution

Future value = Present value * (1 + Rate of interest)^N

As per the above equation, the future value is directly related to the interest rate and hence an increase in interest rate would increase the future value

Present value = Future value / (1 + Rate of interest)^N

As per the above equation, the present value is inversely related to the interest rate and hence an increase in interest rate would decrease the present value

Thus the stateement is TRUE

jeff jeffy answered 2 years ago

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