INTEREST RATES AND INVESTMENT VALUE. An investment broker offers you an opportunity to purchase an investment that pays $2,000 on December 31 of each of the next 10 years.

REQUIRED:

1. What would you pay for this investment if you require an interest (discount) rate of 8% per year?

2. What would you pay for this investment if you require an interest (discount) rate of 12% per year? Briefly explain the effect of this increase in the required interest rate on the present value of the investment.

3. How much would you be willing to pay if you require an interest (discount) rate of 8% per year but the payments are only $1,800 per year? Briefly explain the effect of this decrease in the amount of each payment on the present value of the investment.