3. Present value Finding a present value is the reverse of finding a future valu

Question

3. Present value Finding a present value is the reverse of finding a future value. Which of the following is true about finding the present value of cash flows? Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return. O Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return. Which of the following investments that pay will $16,500 in three years will have a lower price today? O The security that earns an interest rate of 15.00%. The security that earns an interest rate of 10.00%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment that matures in six years An investment that matures in seven years Which of the following is true about present value calculations? Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases Other things remaining equal, the present value of a future cash flow increases if the discount rate increases.

Explanation / Answer

1.
Present Value: Option A
2.
Lower price today: Option A because the higher the interest rate the lower is the price
3.
Eric-Lower price: Option B because the larger the time horizon the lesser is the price
4.
Present value calcualtions: Option A

P.S.: I am allowed to answer only 4 questions

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