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.
a. What is the present value of your investment?
b. What is the present value of your investment if interst rates suddenly increased to 5 percent?
c. Why does a change in interst rates cause the value of your annuity to change?