You and a friend are both thinking of purchasing a financial contract that will pay you $500 at the end of each year for the next three years. You think the risks involved merit a rate of return of 4%, while your friend thinks that 6% is a more appropriate interest rate.
Pick the answer below that best explains why you and your friend differ on the value of the contract.
A. My friend needs a higher payment every year because he sees greater risks.
B. My friend needs to pay more for the contract today due to the risks involved.
C. Since the future payments are constant, I am willing to pay more today than my friend because I will accept a lower return.
D. Since I will accept a lower return, I need to invest a lower amount than my friend for the same future payments.
E. None of the above