Question

Which of the following statements is FALSE?A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.B. Moving cash flows to the left on a time line is called discounting, and values are additive at any one point in time.C. Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate.D. To estimate the present value of future cash flows, the discount rate should be adjusted for both the timing or maturity of that cash flow and the inherent risk of that cash flow.

Answer 1

Answer:

The false statement is letter "A": The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.

Explanation:

Interest on interest or Compound Interest is the money accrued out of an interest rate plus all the interest earned accumulated on a certain period of time. The compound interest can be calculated on a daily, monthly or yearly basis. If the frequency of the compound interest is set in shorter periods of time, it will be more beneficial for the investor.

In that sense, option letter "A" is false since interest on interest does not decline over time but increases.