Which principle is demonstrated by the one-year loan example where $1,000 becomes $1,100?

Which principle is demonstrated by the one-year loan example where $1,000 becomes $1,100?

• A. Present value concept
• B. Time value of money
• C. Opportunity cost
• D. Liquidity preference

Answer: (B)

The main idea is that money has time value because it can earn a return over time. In the one-year loan, $1,000 grows to $1,100, showing a 10% return after a year. This demonstrates the time value of money: having cash today allows you to invest it and earn interest, so its value in the future is higher. Present value is about figuring out what a future amount is worth today, which is the reverse concept and not what this example is illustrating. The other concepts—opportunity cost and liquidity preference—relate to what you could be giving up or wanting to hold in cash, rather than the basic idea that money grows with time.

The main idea is that money has time value because it can earn a return over time. In the one-year loan, $1,000 grows to $1,100, showing a 10% return after a year. This demonstrates the time value of money: having cash today allows you to invest it and earn interest, so its value in the future is higher. Present value is about figuring out what a future amount is worth today, which is the reverse concept and not what this example is illustrating. The other concepts—opportunity cost and liquidity preference—relate to what you could be giving up or wanting to hold in cash, rather than the basic idea that money grows with time.