You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases?
A)It will be worth less.
B)It will be worth more.
C)It will not change.
D)None of the above

Question

Quizplus · Accepted Answer

An increase in interest rate will result in a decrease in present value of the winnings. This is because the future cash flows (the twenty annual payments) are worth less in today's dollars when discounted at a higher interest rate.

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