12. Which of the following statements is not correct? a. The present value of a

Question

 
12. Which of the following statements is not correct?

a. The present value of a three-year $150 annuity due exceeds thepresent value of a three-year $150 ordinary annuity.b. The proportion of the payment that goes toward interest on anamortized loan declines over time.c. If an investment pays interest compounded annually, theeffective, periodic, and stated rates of interest are all thesame.d. If interest rates are positive, the future value of a given sumwill always be less than its present value.e. A loan repaid in equal periodic amounts is called an amortizedloan.

Explanation / Answer

Clearly option d is incorrect of the lot.

If interest rates are positive FV will always be higher than PV. FV = PV * (1 + r)n

so if r is positive FV > PV is signified by this basic TVM function.

Other options - option a is correct, PV of annuity due is greater than PV of ordinary annuity. If you look at the relation between the two PV of annuity due = PV of ordinary annuity * (1 + r).

Option b and e are also correct. when the payments are made equally in periodic amount, loan is called amortized loan. In this periodic payment there is a component of interest and a component of principal repayment. Since with this principal repayment, the amount of loan outstanding declines, the interest also declines and the loan is amortized faster over later period of lives (since principal payment would be higher in those installment, when interest component would be lower). And c is also correct by definition.

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