Asked by Camryn Morrow on May 11, 2024
Verified
You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases?
A) It will be worth less.
B) It will be worth more.
C) It will not change.
D) None of the above
Present Value
Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.
Interest Rate
The percentage charged on borrowed money, or earned through deposited funds, over a period of time.
Lottery
A form of gambling that involves the drawing of numbers at random for a prize.
- Determine the impact of interest rate changes on the present value of future cash flows.
Verified Answer
MF
Michael Fernando FloresMay 16, 2024
Final Answer :
A
Explanation :
An increase in interest rate will result in a decrease in present value of the winnings. This is because the future cash flows (the twenty annual payments) are worth less in today's dollars when discounted at a higher interest rate.
Learning Objectives
- Determine the impact of interest rate changes on the present value of future cash flows.