How are present values affected by changes in interest rates?
A) The lower the interest rate, the larger the present value will be.
B) The higher the interest rate, the larger the present value will be.
C) Present values are not affected by changes in interest rates.
D) One would need to know the future value in order to determine the impact.

Question

Quizplus · Accepted Answer

The present value of a future amount of money is inversely related to the interest rate: as the interest rate decreases, the present value increases, because a smaller discount rate is applied to the future cash flows, making their present value larger. Conversely, as the interest rate increases, the present value decreases.

How Are Present Values Affected by Changes in Interest Rates