In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would:
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A. B. C. D.A
This question is testing your understanding of the relationship between interest rates and present value of future cash flows.
Present value is the current value of a future cash flow or a series of future cash flows, discounted at a specific rate of return. The interest rate used to discount future cash flows is known as the discount rate or the required rate of return.
When interest rates increase, the required rate of return increases, which means that the present value of future cash flows decreases. Conversely, when interest rates decrease, the required rate of return decreases, which means that the present value of future cash flows increases.
Therefore, if the interest rate were to suddenly increase, the present value of the future amount of $5,000 to you would fall. This is because the higher discount rate would decrease the current value of the future cash flow.
So, the correct answer to this question is (A) Fall.