Which of the following statements is true?
A)The process of discounting is the inverse of the process of compounding.
B)Ending balances using simple interest are always greater than ending balances using compound interest at positive interest rates.
C)The present value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates.
D)The future value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates.

Question

Quizplus · Accepted Answer

The process of discounting is essentially the inverse of the process of compounding. Compounding involves taking a present value and calculating its future value based on a specified interest rate and time period. Discounting involves taking a future value and calculating its present value based on the same interest rate and time period. Therefore, the statement in option A is true. Option B is false because compound interest always results in higher ending balances than simple interest at positive interest rates. Option C is false because the present value of an annuity due is always greater than the present value of an equivalent ordinary annuity at positive interest rates. Option D is also false because the future value of an annuity due is always greater than the present value of an equivalent ordinary annuity at positive interest rates.

Which of the Following Statements Is True