Question

Asset $X$ is expected to deliver 3 future payments. They have present values of, respectively, $\$ 1,000, \$ 2,000,$ and $\$ 7,000$ Asset $Y$ is expected to deliver 10 future payments, each having a present value of $\$ 1,000 .$ Which of the following statements correctly describes the relationship between the current price of Asset $X$ and the current price of Asset Y? a. Asset $X$ and Asset $Y$ should have the same current price. b. Asset $X$ should have a higher current price than Asset Y. c. Asset X should have a lower current price than Asset Y.

Name: Problem 3, Chapter 35: Economics: Principles, Problems, and Policies
Uploaded: 2020-04-30T14:37:16-08:00
Duration: 6 min 33 s
Channel: Amit Srivastava

   Asset $X$ is expected to deliver 3 future payments. They have present values of, respectively, $\$ 1,000, \$ 2,000,$ and $\$ 7,000$ Asset $Y$ is expected to deliver 10 future payments, each having a present value of $\$ 1,000 .$ Which of the following statements correctly describes the relationship between the current price of Asset $X$ and the current price of Asset Y?
a. Asset $X$ and Asset $Y$ should have the same current price.
b. Asset $X$ should have a higher current price than Asset Y.
c. Asset X should have a lower current price than Asset Y.

Economics: Principles, Problems, and Policies

Campbell R.… 20th Edition

Chapter 35, Problem 3

Instant Answer

Solved by Expert Amit Srivastava

04/30/2020

Step 1

The current price of an asset is the sum of the present values of all future payments it is expected to deliver. For Asset $X$, the present values of the future payments are $\$1,000$, $\$2,000$, and $\$7,000$. Therefore, the current price of Asset $X$ is: \[ Show more…

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Asset $X$ is expected to deliver 3 future payments. They have present values of, respectively, $\$ 1,000, \$ 2,000,$ and $\$ 7,000$ Asset $Y$ is expected to deliver 10 future payments, each having a present value of $\$ 1,000 .$ Which of the following statements correctly describes the relationship between the current price of Asset $X$ and the current price of Asset Y? a. Asset $X$ and Asset $Y$ should have the same current price. b. Asset $X$ should have a higher current price than Asset Y. c. Asset X should have a lower current price than Asset Y.

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Key Concepts

Present Value

Present value is a fundamental financial concept which determines the current worth of a future sum of money or stream of cash flows given a specified rate of return. This concept reflects the time value of money, indicating that a dollar today is worth more than a dollar in the future because of its earning potential.

Discounted Cash Flow Analysis

Discounted cash flow (DCF) analysis is a valuation method used to estimate the price of an asset by discounting its expected future cash flows to their present values. This approach accounts for the time value of money, ensuring that all future payments are measured on a comparable, current basis.

Aggregation of Cash Flows

Aggregation of cash flows involves summing the present values of individual future payments to determine the total current value of an asset. By adding these discounted cash flows, one can assess the overall price of an asset regardless of the number or timing of expected payments.

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