Question

1. Describe the concept of market efficiency in thecontext of pricing securities. Explain the threedifferent levels of market efficiency

2. Why is money you receive at some future date worth less to you than money you receive today?

if the interest rate (i.e. discount rate) rises, what effect does this have on the present value of payments you receive in the future?

Answer 1

ans....
2
money has its own value, which is called as time value. i.e. the money which we receive in future is not at the same worth of today. because its value will be declined because of inflation. assume that you have given some amount to your friend today, i.e. $1000. and he will be return it to you exactly 1 year later. forget about interest rate, and all the conditions are same. then after one year what ever you receive $1000, can not be carry the same purchasing power. the money value will be declined, in other words, the quantity of goods and services will be decreased when compares to today.
if the lending funds carries interest rate, and if the interest rate is higher, then we may receive higher units of currency. but always future event carries some kind of risk and uncertainty. when the interest rates increases, then the worth of present value of future inflows will declined much more.