Question

Which one of the following statements is correct, all else held constant?

                     a. There is an inverse relationship between the present value and the future value.

                     b. The future value decreases as the time period increases.

                     c. The interest rate is directly related to the present value.

                     d. The present value increases as the time period decreases.

Answer 1

Present value = future value/ (1 + interest rate)^period

Present value and future value have a direct relationship. Future value will increase as the time period increases. The interest rate is indirectly realted to the present value and not dorectly. Also, the present value increases as time period reduces as they hold an inverse relationship. Therefore, the correct option is-

D. The present value increases as time period reduces.

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