Multiple Choice
What is the present value of a \$200 payment to be received in three years if the discount rate is 8\% per year, compounded annually?
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10. Time Value of Money
Time Value of Money Equations
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Which of the following best describes an amount paid for the use of money for a period of time?
A
Depreciation
B
Principal
C
Dividend
D
Interest
Verified step by step guidance1
Understand the concept of 'Interest': Interest is the cost of borrowing money, typically expressed as a percentage of the principal amount, paid over a specific period of time.
Differentiate between the given terms: Depreciation refers to the reduction in the value of an asset over time. Principal is the original amount of money borrowed or invested. Dividend is a distribution of profits to shareholders. Interest, however, is specifically the payment for the use of money over time.
Identify the key characteristic of the question: The phrase 'amount paid for the use of money for a period of time' directly aligns with the definition of interest.
Eliminate incorrect options: Depreciation, principal, and dividend do not describe payments for the use of money over time. This leaves interest as the correct answer.
Conclude that the correct term describing an amount paid for the use of money for a period of time is 'Interest'.
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