Which of the following statements is TRUE? A) With simple interest, interest is

Question

Which of the following statements is TRUE?

A) With simple interest, interest is earned each period on the original starting amount as well as on any interest earned in earlier periods

B) As bond ratings go from A to AA to AAA, the return that investors require goes up

C) Ceteris paribus, a higher interst rate would increase the present value

D) The reward for postponing consumption describes the interest rate from the point of view of the creditor

Please tell me why the other 3 answers are false

Explanation / Answer

A. No, simple interest is earned every year in the principal amount only. In compounding return, interest is earned on principal as well as interest earned in earlier period.

B. AAA is the highest rating of bond, Which means less risk kf default and hence less return. When we go down the sequence I.e. From AAA to AA, A and so on interest rate rises.

C. Ceteris paribus means all else unchanged. Widely used in economics.

D. The reward for postponing consumption describes interest rate for an investor not creditor, who forgoes his present consumption by investing in a stock and rewarded by interest rate.

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