Which of the following statements are correct?
(A) A fund which is created to accumulate money over the years to discharge a future obligation is called a sinking fund.
(B) The amount or future value of perpetuity is well-defined.
(C) The sinking fund be used in any emergency.
(D) An equated monthly installment is a fixed payment made by a borrower to a lender at a specific date every month to clear off the loan.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (D) only
(A) A fund which is created to accumulate money over the years to discharge a future obligation is called a sinking fund. — Correct. This is the definition of a sinking fund.
(B) The amount or future value of perpetuity is well-defined. — Incorrect. The payments of a perpetuity never stop, so their amount (future value) grows without limit and is not defined. Only the present value of a perpetuity, \(\frac{R}{i}\), is finite.
(C) The sinking fund be used in any emergency. — Incorrect. A sinking fund is set aside for one specific future obligation, such as repaying a debt or replacing an asset, and is not meant for emergencies.
(D) An equated monthly installment is a fixed payment made by a borrower to a lender at a specific date every month to clear off the loan. — Correct. This is the definition of an EMI: the same amount every month, covering the interest and part of the principal, until the loan is repaid.