Multiple Choice
If a credit card has an annual percentage rate (APR) of 15.99\%, what is the monthly periodic interest rate (rounded to two decimal places)?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Which of the following is true when interest rates rise?
A
The future value of a present cash flow remains unchanged.
B
The present value of a future cash flow decreases.
C
The present value of a future cash flow increases.
D
The future value of a present cash flow decreases.
Verified step by step guidance1
Understand the relationship between interest rates and present value: When interest rates rise, the discount rate used to calculate the present value of future cash flows increases. This results in a lower present value because future cash flows are discounted more heavily.
Understand the relationship between interest rates and future value: The future value of a present cash flow is determined by compounding the cash flow at the given interest rate. If interest rates rise, the future value of a present cash flow increases because the compounding effect is stronger.
Analyze the options provided: Evaluate each statement in the context of the relationships explained above. For example, 'The future value of a present cash flow remains unchanged' is incorrect because future value depends on the interest rate.
Focus on the correct statement: 'The present value of a future cash flow decreases' is correct because higher interest rates lead to a higher discount rate, reducing the present value of future cash flows.
Conclude the reasoning: The correct answer is based on the fundamental principles of time value of money, where interest rates directly impact the present and future values of cash flows.
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