Final answer:
The statement that future value is compounded by an interest rate and present value is discounted by an interest rate is the most correct. future value accounts for the principal and the interest earned on it over time while present value estimates the current worth of a future sum considering a specific rate of return.
Step-by-step explanation:
Regarding the question, Which of the following statements is most correct? Select one: the more correct statement is that future value is compounded by an interest rate, and present value is discounted by an interest rate. When calculating future value we apply the compound interest formula to the principal to account for interest on interest earned over time. the future value is indeed the principal amount plus the interest earned on both the initial principal and the accumulated interest over various periods.
On the other hand, present value represents the current worth of a future amount of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Specifically, present value calculations involve determining what an amount of money in the future is worth in today's dollars, essentially 'uncompounding' the future value by the interest rate.The difference between the future value and the present value can indeed be conceptualized as compound interest, as they represent the same principal amount in two different points in time due to the effect of compounding interest.