4. 39.

Present value and interest rates [LO 6.1] What is the relationship between the value of an annuity and the level of interest rates?

Suppose you just bought an annuity with 11 annual payments of $8 500 per year at the current interest rate of 10 per cent per year. What happens to the value of your investment if interest rates suddenly drop to 5 per cent? What if interest rates suddenly rise to 15 per cent?