Question

When an individual obtains a car loan and makes all of the regular monthly payments, the sum of the payments made will exceed the purchase price of the car. This is due primarily to the core principle:

A. Risk requires compensation
B. Information is the basis for decisions
C. Markets determine prices and allocate resources
D.Time has value

Answer 1

Answer:

Correct option is (D)

Explanation:

One of the principles of money and banking is that time has value. Money worth today is not the same as it is worth tomorrow. For the same reason, money received today has more value than received tomorrow as the same could be invested elsewhere.

This is the reason why interest is charged on money paid later to compensate for the opportunity lost to invest elsewhere. As such, if car is obtained on loan, the installment paid includes the interest levied on loan. This is the reason that sum of installments are higher than the purchase price.