Which one of the following statements is correct concerning the time value of money?
A)The future value of $1 at the end of two years is equal to $1 plus the first year's interest times 1 plus the annual interest rate.
B)As the interest rate increases for any given year, the future value interest factor will decrease.
C)The future value of $1 decreases with the passage of time.
D)The future value interest factor is equal to zero if the interest rate is zero.

Question

Quizplus · Accepted Answer

The statement A is correct as it describes the formula for calculating the future value of a single sum invested for two years. The future value can be obtained by multiplying the present value by the product of (1 + interest rate) raised to the power of the number of periods. Therefore, the future value at the end of year one will be (1 + interest rate) times the present value, and the future value at the end of year two will be (1 + interest rate) squared times the present value. Hence, the future value of $1 at the end of two years is equal to $1 plus the first year's interest times 1 plus the annual interest rate.

Option B is incorrect because the future value interest factor is directly proportional to the interest rate. So, as the interest rate increases, the future value interest factor will also increase.

Option C is also incorrect because the future value of money increases with the passage of time due to the effect of interest.

Option D is incorrect because the future value interest factor is defined as the value of (1 + interest rate) raised to the power of the number of periods, which will be greater than zero even if the interest rate is zero.

Which One of the Following Statements Is Correct Concerning the Time