Which one of the following statements is correct?
a. The future value of an annuity increases when the interest rate
decreases.
b. The present value of an annuity increases when the interest rate
increases.
c. The present value of an annuity is unaffected by the number of
the annuity payments.
d. The future value of an annuity is unaffected by the amount of
each annuity payment.
e, The present value of an annuity increases when the interest rate
decreases.
Answer;
The following statement is correct:
e. The present value of an annuity increases when the interest rate decreases.
Note:
1) There is a inverse relationship between present value and interest rate which means if the interest rate increases, the present value decreases as future values will be discounted at higher rate and vice-versa.
2) There is direct relationship between future value and interest rate which means that if the interest increases, the future value will be higher as now the present value will be compounded at higher rate over the period of annuity.
3) Further, higher will be the number of annuity payment and amount of each annuity, higher will be the present value of annuity and Future value of annuity, so there is a significant affect of both on present and future value.
Get Answers For Free
Most questions answered within 1 hours.