If the interest rate is zero, a promise to pay $3,000 in two years is equal...

If the interest rate is zero, a promise to pay $3,000 in two years is equal to receiving the money today. Using one or more of the core principles of money and banking, explain why this statement is true or false.

Expert Solution

The statement is true

Explanation with respect tocore principles of money &banking

Time has value- Time has values: Time affects the value of financial transaction. A dollar today is not the same as a dollar tomorrow. This is because, if you have a dollar today, you can put it in some interest bearing account and get more than a dollar back tomorrow.

Since interest rate is 0,even if you invest it for 2 years its value will remain the same.Hence it does not make any difference whether you receive $3000 today or after 2 years.

Risk

Risk (potential losses) is unavoidable and requires compensation. Usually higher risk opportunities have higher interest rates(i.e., higher reward).

Since interest rate is 0%,it shows that risk is nil.So there is no chance of default and hence the value of $3000 will remain same from today to next 2 years.Hence it does matter whether you receive money today or 2 years later.

jeff jeffy answered 1 year ago

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