Which of the following statements is correct?
A) If a bank uses quarterly compounding for saving accounts,the simple rate will be greater than the effective annual rate.
B) The present value of a future sum increases as the simple interest rate increases or the number of discount periods per year decreases.
C) The present value of a future sum increases as either the simple interest rate or the number of discount periods per year increases.
D) The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
E) All of the above statements are false.

Question

Quizplus · Accepted Answer

The present value of a future sum decreases as the interest rate or the number of discount periods per year increases because a higher interest rate or more frequent compounding (more discount periods) means a higher discount factor applied to the future sum, thus reducing its present value.

Which of the Following Statements Is Correct