Which of the following is/are correct?• A: The interest rate, i, makes current and future currency amounts equiv-alent based on their time value.• B: The future value, FV is the present value, PV, times the future valuefactor, (1 + i)n.• C: The effective annual rate is the amount by which a unit of currencywill grow in a year with interest on interest included.
Question
Which of the following is/are correct?• A: The interest rate, i, makes current and future currency amounts equiv-alent based on their time value.• B: The future value, FV is the present value, PV, times the future valuefactor, (1 + i)n.• C: The effective annual rate is the amount by which a unit of currencywill grow in a year with interest on interest included.
Solution
All of the statements A, B, and C are correct.
A: The interest rate, i, does indeed make current and future currency amounts equivalent based on their time value. This is the fundamental concept behind the time value of money, which states that money available today is worth more than the same amount in the future due to its potential earning capacity.
B: The future value (FV) is indeed the present value (PV) times the future value factor, (1 + i)^n. This is the formula for calculating future value when you know the present value, the interest rate, and the number of periods.
C: The effective annual rate is the amount by which a unit of currency will grow in a year with interest on interest included. This is a more accurate measure of interest than the nominal rate, as it takes into account the effects of compounding.
Similar Questions
.Which of the following represents the future value of a present sum of money?Answer areaThe sum plus the interest earned over a specified periodThe sum multiplied by the interest rate.The sum minus the interest earned over a specified period.The sum divided by the interest rate.
Which of the following statements is FALSE?a.The annual percentage rate indicates the amount of simple interest earned in one year.b.Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.c.The effective annual rate indicates the amount of interest that will be earned at the end of one year.d.None of them.e.The annual percentage rate indicates the amount of interest including the effect of compounding.
Relationship between the Present and Future value of a single amount of money ▪ Let 𝑃 and 𝐹 be the present (current time period) and future (i.e. time period 𝑛) value of a single amount assuming interest rate will remain at 𝑖% per period within the entire time period considered. Then, 𝑃 and 𝐹 are related by the formula: 𝐹 = 1 + 𝑖 𝑛 ▪ Note that this formula is for a single amount, and 𝑛 is the number of periods from the future period to whatever present time in mind. ▪ Usually, the present is time zero. However, there will be instances where for purposes of calculation sake one could assume say, time period 3 as the present, and later consider time period 3 as the future to be taken to time zero. This will become clear later.
The future value of one dollar today in five years ______ as the interest rate increases.DecreasesIncreasesdoes not changecannot be determinedNone of these are correct
Multiple Choice QuestionWhat is the term that describes the amount to which some current amount of money will grow as interest compounds over time?Multiple choice question.future valuepresent valueprincipaltime-value of money
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