Discounting can tell a person what an amount of money is worth now and how much to invest now in order to have a set amount later.

• A. Discounting
• B. Compounding
• C. Inflation
• D. Amortization

Answer: (A)

This question is about the time value of money and present value—the idea that money available today is worth more than the same amount in the future because it can earn interest. Discounting is the process used to determine what a future amount is worth today, or how much you would need to invest now to reach a specific future sum.

So discounting tells you the present value of a future target, and it also tells you how much to invest today to have a set amount later. For example, if you want $10,000 in five years and the relevant rate is 5%, you’d need about $7,835 today because 7,835 × (1.05)^5 ≈ 10,000.

Compounding, by contrast, describes growing an amount forward to a future value. Inflation reflects how prices and purchasing power change over time. Amortization is the schedule for repaying a loan. Among these, discounting best fits the idea of translating a future sum into its value today and determining the necessary present investment.