Suppose the nominal interest rate is zero. In this situation, the present discounted value of a finite sequence of future payments is equal to which of the following:
A) the sum of zero.
B) the square of the sum of all payments.
C) the sum of all the payments divided by the rate of inflation.
D) the sum of all payments.
E) the average value of each payment.

Question

Quizplus · Accepted Answer

When the nominal interest rate is zero, the present discounted value of a finite sequence of future payments is simply the sum of all the payments. This is because there is no discounting or compounding happening due to the zero nominal interest rate. Thus, the correct answer is option D.

Suppose the Nominal Interest Rate Is Zero