Problem:
What is the relationship between the value of an annuity and the level of interst rates? Suppose you just bought a 10-year annuity of $10,000 per year at the current interest rate of 3 percent per year.
Required:
Question 1: What is the present value of your investment?
Question 2: What is the present value of your investment if interst rates suddenly increased to 5 percent?
Question 3: Why does a change in interst rates cause the value of your annuity to change?
Note: Provide support for your rationale.