Practice Questions (Chapter 4) Solution

Practice Questions (Chapter 4) Solution - Econ 500 SFSU...

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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. Basically, you are taking lower to
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Practice Questions (Chapter 4) Solution - Econ 500 SFSU...

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