If the prevailing interest rate is 10 per cent, a rational person should be indifferent between receiving €1,000 today and €1,000 one year from today.

Question

Quizplus · Accepted Answer

A rational person would prefer to receive €1,000 today rather than wait for one year to receive the same amount, as the prevailing interest rate of 10% means that the future value of the €1,000 will be €1,100 in one year. Therefore, receiving €1,000 today is worth more than receiving €1,000 one year from today.

If the Prevailing Interest Rate Is 10 Per Cent, a Rational