Which of the following statements is true? a. The higher the discount rate, the higher the present value. b. The process of accumulating interest on interest is referred to as discounting. c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today. d. If a single sum is due on December 31, 2020, the present value of that sum decreases as the date draws closer to December 31, 2020.

Question

Kaliyah Kaufman

Business

15 December, 15:05

Which of the following statements is true? a. The higher the discount rate, the higher the present value. b. The process of accumulating interest on interest is referred to as discounting. c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today. d. If a single sum is due on December 31, 2020, the present value of that sum decreases as the date draws closer to December 31, 2020.

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Answers (1)

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Lena Gomez · Answer 1

C

Explanation:

Compound interest is a practice of reinvesting the the principal amount and the interest earned instead of paying out the interest. With this method, the total value of money increases with time.

However, the value of the money (principal + interest) in the first year sing this method is the same as the simple interest method.

If a money is worth 10% compounded annually. $1100 in one year is $1000 today.

Workings

Interest rate - 10%

One year value (100%+10%) - $1100

Current value = 100/110*1100

= $1000