Question

ashlees friend owes her $100, but he cannot pay it back today. instead, ashlees friend promises to pay her $120 in one year to account for the time value of money. that extra $20 represents the ________.

○ interest
○ discount
○ present value

Explanation:

To determine the correct term, we analyze each option:

• Interest: Interest is the extra amount paid (or earned) for the use of money over time. Here, the friend owes $100 (principal) and pays $20 extra after a year, which fits the definition of interest.
• Discount: A discount is a reduction in price or amount, which is the opposite of what's happening here (an increase in the amount paid back).
• Present Value: Present value is the current worth of a future sum of money, not the extra amount. The $100 is the present value of the $120 to be received in a year.

Answer:

A. interest