Econ 500 – SFSU
Handout 2 – Questions ch.4
Answer Key
Z. Janko
Fall 2011
True/False/Uncertain.
l. The present value (PV) of a given future amount (X), is always greater than X.
A dollar today is worth more than a dollar in the future.
This has the implication that if I obtain X
in the future, the PV of that future X dollars is LOWER than X.
Basically, since I am able to invest
at some positive interest rate, I can start today with less than X to end up with X in the future.
2. The larger the n (term to maturity), the lower the PV of a future value.
Case 1.
Suppose you are thinking about 1 payment that you will receive in the future.
If that
payment is received in 10 years (n=10) vs. in 5 years (n=5), the PV of that payment will be
drastically different.
The farther in the future that I receive a given dollar, the less it is worth in PV,
because I am discounting a longer period of time.
Hence, as n increase, the PV of that given
payment is less.
Case 2.
Suppose you are thinking about a fixed payment loan, where the only thing that you are
changing is n. In this case, a rise in n is equivalent to a rise in the time allowed to repay the loan.
If I
take longer to repay a loan, and I am still making 1000$ per month in payments (assume i is
unchanged) then of course a rise in n means that the PV is larger.
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 Fall '09
 10 Years, 1000$

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