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Which of the following statements is true? A. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today. B. The process of accumulating interest on interest is referred to as discounting. C. The higher the discount rate, the higher the present value. D. If a single sum is due on December 31, 2014, the present value of that sum decreases as the date draws closer to December 31, 2014.

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Answer:

A. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today

Explanation:

this point is easily calculated, the key is to see the word compounded anually, so here is asked to calculate a present value:

[tex]PV=1.100*(1+10\%)^{-1}[/tex]

so PV =1.000

the others oprions are not true because of:

B. accumulating interest is not discounting, because accumulating refers to receive/pay interest in the future, discounting is the process in which interest is paid today

C. this is also not true, and it not make sense at all a discount rate doesn´t implies a higher present value, it is because it uses the contrary formulas of accumulating.

D. this is not true is the opposite, it means that closer to due date the present value increases beacause it gets closer to what you have to pay.

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