Scenario 15.1:
This year Jacob Verytall signs a "Fifty Million Dollar" contract with the Mission City Muckrakers, a new basketball team. He will be paid $10 million per year over the next 5 years beginning next year. The interest rate is 10%, and the Muckrakers have enough in the bank to generate the payment stream.
-Refer to Scenario 15.1. If the interest rate is expected to fall to 5% in years 4 and 5, in terms of current dollars the value of the Muckrakers payments will:

Question

Quizplus · Accepted Answer

The value of the Muckrakers' payments in current dollars will rise if the interest rate falls in years 4 and 5. This is because the present value of future payments increases as the discount rate (interest rate) decreases. Lower interest rates in years 4 and 5 mean that the payments made in those years are discounted at a lower rate, increasing their present value compared to what it would be at a constant 10% interest rate.

Scenario 15.1: This Year Jacob Verytall Signs a "Fifty Million Dollar" Contract