Vince Says That the Present Value of $500 to Be

question 11

Multiple Choice

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent.Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.

• A)Both Vince and Terri are correct.
• B)Only Vince is correct.
• C)Only Terri is correct.
• D)Neither Vince nor Terri is correct.

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Definitions:

Call Premium

The extra amount over the bond's face value that investors must pay to call away a bond before its maturity date.

Term Structure

The connection between different terms or maturities and interest rates or bond yields.

Fisher Formula

An equation used to identify the nominal interest rate or the required rate of return on an investment, taking inflation into account to determine the real interest rate.

Coupon

The interest rate on a bond, usually expressed as a percentage of the face value and paid at regular intervals.