Question

1. Which of the following statements is incorrect?

a. Compounding increases the growth of the total interest earned.

b. Compound interest consists of both simple interest and interest on interest.

c. All the answers are correct except one.

d. Compounding is the process by which interest earned on an investment is reinvested so that in future periods, there is interest on interest as well as the original principal.

e. The term (1 + i) is the present value interest factor, often called simply the present value factor, for a single period, such as one year.

2. Which of the following statements is incorrect?

a. According to the strong-form of the efficient market hypothesis, the market for a security is perfectly informationally efficient if the security's price always reflects all information both public and private.

b. Real rate of interest is an interest rate determined in the absence of inflation.

c. All the answers are correct except one.

d. The loans of the business finance companies are never secured by accounts receivable or inventory but rather based on trust among the companies.

e. Money market instruments are lower in risk than other securities because of their high liquidity and low default risk.

Answer 1

1. (E) the incorrect statement is that the term (1+i)is the present value interest factor which will be often called simply the present value factor or single period such as one year.

all the other statements related to compounding are correct because compounding interest are consisting of both the simple interest and the interest on interest along with it will be also increasing the growth of the total interest and it will be a process in which the interest earned on investment is reinvested in the future.

Correct answer will be option (e)

2. (D) the incorrect statement is option(D) because the loans are not secured by the trust and it has to be secured by receivables of the company.