Question

1) The time value of money is created by:

a) the elimination of the opportunity cost as a consideration

b) the fact that the mere passing of time increases the value of money

c) the fact that saving money is better than spending it

d) the existence of profitable investment alternatives and interest rates

2) In an amortization schedule for a six-year loan with equal annual principal repayments,__.

a) the annual payment stays the same

b) amount of principal repaid decreases each year

c) less than half of the loan would be repaid at the end of year three

d) the annual payments are higher in the earlier years

Answer 1

1.d.the existence of profitable investment alternatives and interest rates.

time value of money is mainly due to the fact that money invested in certain places will earn interest.

mere passing of time does not increase the value of money.

time value is not created by idle savings.

2.d.the annual payments are higher in the earlier years.

since, we are having equal annual principal payments, we shall be having higher outstanding loan amounts in the earlier years.

This will result in higher interest in initial years, so we shall be having higher annual payments in the initial years.