You Own a Contract That Promises an Annuity Cash Flow

question 48

Multiple Choice

You own a contract that promises an annuity cash flow of $100 year-end cash flows for each of the next three years (note: the first cash flow is exactly one year from today) .At an interest rate of 10%,what is the present value of this contract?

• A)$248.69
• B)$273.55
• C)$331.00
• D)$364.10

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Definitions:

Annual Real Rate

The annual rate of return on an investment, adjusted for inflation, indicating the real increase in the value of the investment over a year.

Inflation Rate

The pace at which prices for goods and services increase, leading to a decrease in purchasing power.

Nominal Rate of Interest

The advertised interest rate on a loan or investment, not accounting for inflation.

Purchasing Power

The amount of goods or services that one unit of currency can buy, often used to measure the impact of inflation.