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 is always greater than the ending balance using compound interest at positive interest rates.
C) Present value of an annuity due is always less than the present value of an equivalent annuity at positive interest rates.
D) All of the above are true.

Question

Quizplus · Accepted Answer

The statement that is true is A. The process of discounting is the inverse of the process of compounding. Discounting is the process of determining the present value of future cash flows while compounding is the process of determining the future value of present cash flows. They are inverse processes in that the formulas used are mathematically opposite. The other statements are false. Ending balances using simple interest are always lesser than the ending balance using compound interest at positive interest rates, and the present value of an annuity due is always greater than the present value of an equivalent annuity at positive interest rates.

Which of the Following Statements Is True