Multiple Choice
Which of the following would increase the present value of a single future cash flow, assuming all other factors remain constant?
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10. Time Value of Money
Time Value of Money Equations
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Which term best describes an amount paid for the use of money for a period of time?
A
Interest
B
Dividend
C
Principal
D
Amortization
Verified step by step guidance1
Understand the concept of 'Interest': Interest is the cost of borrowing money or the return on investment for lending money, typically expressed as a percentage of the principal amount over a specific period of time.
Review the term 'Dividend': Dividend refers to the distribution of a portion of a company's earnings to its shareholders, usually in the form of cash or additional shares. It is not related to the cost of borrowing money.
Examine the term 'Principal': Principal is the original sum of money borrowed or invested, excluding any interest or earnings. It is not the amount paid for the use of money.
Analyze the term 'Amortization': Amortization refers to the gradual repayment of a loan over time through scheduled payments, which include both principal and interest. It is not the direct cost of using money.
Conclude that 'Interest' is the correct term, as it specifically describes the amount paid for the use of money over a period of time.
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