Question

Given below are two statements:
Statement I: In international trade, a loan that may be repaid in the borrowers' currency is called Soft Loan.
Statement II: The period required for the investment in a project to produce a visible return is called the payback period.
In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both Statement I and Statement II are true
• B. Both Statement I and Statement II are false
• C. Statement I is correct but Statement II is false
• D. Statement I is incorrect but Statement II is true

Hint:

Exam Tip:
Soft Loan: Loan with concessional terms (low interest, long maturity).
Payback Period: The time it takes to recover the initial investment.
For project evaluation, remember different appraisal techniques like NPV, IRR, and Payback Period.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
This question tests knowledge of international finance and project appraisal terminology. We need to evaluate the accuracy of each statement.

Step 2: Evaluating Statement I:
Statement I says: "In international trade, a loan that may be repaid in the borrowers' currency is called Soft Loan."
A Soft Loan is a loan with a below-market interest rate, often with favorable terms like a long grace period.
It is usually provided by governments or international agencies for development purposes.
The currency of repayment is not the defining characteristic of a soft loan.
A loan that can be repaid in the borrower's currency is typically called a Currency Swap or a loan denominated in the borrower's currency.
A soft loan can be in any currency.
Therefore, Statement I is incorrect.

Step 3: Evaluating Statement II:
Statement II says: "The period required for the investment in a project to produce a visible return is called the payback period."
The Payback Period is a capital budgeting technique that measures the time required to recoup the initial investment from the project's cash flows.
This is the exact definition of the payback period.
Therefore, Statement II is correct.

Step 4: Final Answer:
Statement I is incorrect and Statement II is true. Therefore, option (D) is correct.