Question

1) General Guidance: This question requires you to demonstrate your understanding of Time Value of Money (TVM). You will type your discussion in response to the question posed in the text box provided below. Ensure you address the requirements of the question. Do not simply copy and paste sample discussions from the textbook and module solutions. Instead, you should paraphrase and be sure to contextualise your discussion.

Question/ Task: Explain the relationship between interest rates and Present Values. If interest rates rise, what might happen to Present Values? To keep the same Present Value, how must the investment term (time) or annuity payments change to compensate for an interest rate increase? (60 – 80 words)

Answer 1

Interest rate and present value will be having a inverse relationship because when the interest rates will be going higher,the present value associated with an investment will go lower because of the higher discounting rate.

This can be related to the the concepts that when there is a high discounting rate applicable to the overall streams of the cash flows, it would be leading to a lower present value and when there is a lower discounting factor associated with the overall cash flows it would be leading to a higher present value.

To keep the same present value, investment or annuity payments should be changing at the rate of interest rate change, to help the the company retain the same present value because when there would be similar change in the interest rate then the deduction in the present value would be nullified.