Suppose you received $1,000 and you wish to find its value in 10 years. Calculat

Question

Suppose you received $1,000 and you wish to find its value in 10 years. Calculate the value of this gift if the interest rate was 8% per year, 10% per year, and 12% per year. What can be said about interest rates in this problem?

A - As rates increase, present value decreases at a decreasing rate.

B - As rates increase, present value decreases at an increasing rate.

C - As rates increase, future value increases at a decreasing rate.

D - As rates increase, future value increases at an increasing rate.

Explanation / Answer

Answer: D- As rate increases, Future value increases at an increasing rate.

Foemula for Future value calculation:

Future Value = Present Value x (1 + Interest rate)^n

As the interest rate increases the value of multiplier with present value increases which result in increase in future value.

In the given case, we wishes to find the value in next 10 year at 8% 10% and 12%. As the interest rate increases value, future value of present value increases.

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