Explain the relationship between interest rates and present values.  Why is this? 

In finance and economics, the relationship between present value and interest rate is fundamental. The value of a given asset will decrease as the interest rate increases. It happens because as interest rates go up, people find it more difficult to borrow and are therefore less likely to invest in or buy assets. Higher interest rates cause a decrease in demand for some products, which then causes the present value (the price or current market worth at a certain point) to drop.

Another reason why this relationship exists is due to something known as “opportunity cost”; investors must weigh their options before making any decisions regarding their finances, meaning they must consider not only the return on investment from one option but also what could be earned elsewhere if choosing another option instead (i.e., an opportunity cost). If two investment opportunities had equal returns, but the one with a higher return rate was chosen by the investor because it would give them a better value overall.

Finally, understanding how present values are affected by changes in interest rates helps individuals make more informed financial decisions—for example if an investor knows that increasing their borrowing costs will cause the value of their investment to decrease then they can try mitigating losses by considering alternate strategies (such as switching investments or deferring payments). This information allows investors to compare various scenarios in order to determine the ones that will result in better long-term outcomes.