Textbook Problem

If the interest rate is zero, then $100 to be paid in 10 years has a present value that is

a. less than $100.

b. exactly $100.

c. more than $100.

d. indeterminate.

To determine

Calculation of present value of money.

Answer to Problem 1CQQ

Option “b” is correct.

Explanation of Solution

Option (b):

Present value of money can be calculated as follows.

$\begin{array}{c}\text{Present value}=\frac{\text{Future value}}{{\left(1+\text{Interest}\right)}^{\text{Time period}}}\\ 100=\frac{100}{{\left(1+0\right)}^{10}}\\ 100=\frac{100}{1}\\ 100=100\end{array}$

Thus, the option “b” is correct.

Option (a):

The present value would be less than $100 if the interest rate is positive. Thus, the option ‘a’ is incorrect.

Option (c):

The present value is greater than $100, if the interest rate is negative. Thus, the option “c” is incorrect.

Option (d):

The present value can be determined by using future value, interest rate, and the time period. Thus, the option “d” is incorrect.

Economics Concept Introduction

Concept introduction:

Present value: Thepresent value refers to the today’s value of the future amount that adjusted with the existing interest rate.