Question

1(a.) (TRUE or FALSE?) We mark it up the value of a future promised or expected cash payment because it is worth more if the same amount of money is to be received later rather than now.

1(b). (TRUE or FALSE?) Money expected or promised in the future is worth less than the same amount of money in hand today.

1(c). (TRUE or FALSE?) The payments of an amortized loan reflect a decreasing amount going toward principal and an increasing amount going toward interest over time.

Answer 1

1 a) FALSE.

Same amount of money is to be received later rather than now is worth less. This is because inflation reduces the value of future amount. If something can be purcahsed at USD 100 today and if suppose infaltion is 2% yearly then next year same thing will be prices at USD 102. Thus value of 102 next year will same as 100 this year.

1 b) TRUE

Money expected or promised in the future is worth less than the same amount of money in hand today. As explained above, If something can be purcahsed at USD 100 today and if suppose infaltion is 2% yearly then next year same thing will be prices at USD 102. Thus value of 102 next year will same as 100 this year. So money promised one year after for USD 100 will be worth 100/1.02= 98.04 today

1 c) FALSE

The payments of an amortized loan reflect a increasing amount going toward principal and an decreasing amount going toward interest over time. The interest is caluclated on Amount outstanding. Thus as EMI is paid, some amount goes for interest and some goes for principal. So Principal will be decreased by same amount. The interest as % will also decrease. Thus more amount will go towards principal