On your 20th birthday, a dear aunt sends you a lovely card and an IOU for $1,000, to be paid on your 21st birthday. Eager to lay your hands on the cash (after all, the Spice Girls only have a reunion tour every decade or so), you try to sell your aunt's IOU to your sister.
a. If interest rates are 6%, what is the most your sister should be willing to pay for the IOU?
b. If interest rates are 9%, what is the most your sister should be willing to pay for the IOU?
c. Does the value of your aunt's promise go up when interest rates rise? Explain why or why not.