Author Question: Write the equation for present value. How are prices and interest rates related? Refer to your ... (Read 58 times)

ahriuashd · **on:** Jul 10, 2018

Write the equation for present value. How are prices and interest rates related? Refer to your equation when answering the first part of this question.

Give an example of a real-world situation in which knowing the relationship between prices and interest rates would be valuable.
What will be an ideal response?

Question 2

Consider the TVM equation: Present value and time period are inversely related.

Indicate whether the statement is true or false.

dreamfighter72 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: From the present value equation, PV = FV , the student should understand that prices (i.e., present values) are inversely related to interest rates. An increase in one leads to a decrease in the other if we hold the other inputs constant. We see this in many places in the economy such as the negative impact on stock and bond prices when interest rates rise or are expected to rise.

Answer to Question 2

Answer: TRUE