Question

Given below are two statements:
Statement I: The present value of the future sum is the current value of the investment to be received in the future.
Statement II: Future value of present sum is an important concept in financial analysis and this is called Compounding.
In the light of the 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:
Compounding: Present Value \(\rightarrow\) Future Value (Moving money forward in time).
Discounting: Future Value \(\rightarrow\) Present Value (Moving money backward in time).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests the understanding of two fundamental concepts in financial mathematics: Present Value (Discounting) and Future Value (Compounding).

Step 2: Evaluating Statement I:
Statement I says: "The present value of the future sum is the current value of the investment to be received in the future."
This is the correct definition of Present Value (PV).
PV is the current worth of a future sum of money, given a specified rate of return (discount rate).
Therefore, Statement I is true.

Step 3: Evaluating Statement II:
Statement II says: "Future value of present sum is an important concept in financial analysis and this is called Compounding."
This is the correct definition of Future Value (FV).
Compounding is the process of finding the future value of a present sum by applying interest over time.
Therefore, Statement II is true.

Step 4: Final Answer:
Since both Statement I and Statement II are true, the correct option is (A).