Why an increase in the margin requirement does not affect (no change) the present value of...

Why an increase in the margin requirement does not affect (no change) the present value of an annuity ?

Expert Solution

Answer - Margin requirement is the percentage of a security's value that may be used as a collateral loan to finance the purchase. An increase in margin requirements would stop the borrower to take loan as the value of its security would not lend him the amount he need and therefore it will happen for all general public and would lead to decrease in money supply.

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. In case of inflation, the margin requirement is increased so that demand for loans are decreased and in case of deflation, margin requirements are decreased so that demand for loans are increased.

The present value of an annuity is the current value of future payments from an annuity, given a specified rate of return, or discount rate. The higher the discount rate, the lower the present value of the annuity.

The present value of an annuity is based on a concept called the time value of money. Payments scheduled decades in the future are worth less today because of uncertain economic conditions. In contrast, current payments have more value because they can be invested in the meantime.

So we can say that an increse in the margin requirement does not affect the present value of an annuity.

ekkarill92 answered 1 year ago

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