General Studies · Time Value of Money
When evaluating the present value of a series of future cash flows, how does a significant increase in the market discount rate affect the calculated value of a perpetuity compared to a fixed-term annuity of twenty years?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The market discount rate only affects the future value of these instruments and has no mathematical impact on the present value calculation.
- 2The fixed-term annuity will decrease in value more significantly than the perpetuity because its cash flows are limited and more sensitive to immediate rate changes.
- 3The present value of both will decrease, but the perpetuity will experience a more significant percentage decline because its cash flows extend infinitely into the future.✓
- 4Both the perpetuity and the fixed-term annuity will increase in value because a higher discount rate implies a higher return on reinvestment.
Correct answer
The present value of both will decrease, but the perpetuity will experience a more significant percentage decline because its cash flows extend infinitely into the future.
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