Which of the following statements is TRUE?Select one: Lenders won't charge any interest rate when...

Which of the following statements is TRUE?

Select one: Lenders won't charge any interest rate when there are no inflation and no default risk. Nominal interest rate cannot be lower than real interest rate. When market interest rate increases, the longer the maturity of the existing bond is, the higher the return on that bond is. The lower the interest rate used to discount the future payments is, the higher the present value of the payments is.

Solutions

Expert Solution

The correct answer is: d)

Reason: consider the following example,

Say you receive $100 after a year.

When the interest rate is 10%, the PV of the amount is:

100/(1.10) = 90.90

And, when the interest rate is 5%, the PV of the same amount is: 100/(1.05) = 95.24.

Hence the lower the interest rate used for discounting future payments, the higher the PV of the payments

Rahul Sunny answered 2 years ago

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