Chapter 4

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

6.5 percent simple interest

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period.

Precision Engineering invested $125,000 at 6 percent interest, compounded annually for 3 years. How much interest on interest did the company earn over this period of time?

$1,377

You just won $30,000 and deposited your winnings into an account that pays 3.9 percent interest, compounded annually. How long will you have to wait until your winnings are worth $75,000?

23.95 years $75,000 = $30,000 x(1 + .039)t t = 23.95 years

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest.

The relationship between the present value and the investment time period is best described as:

inverse.

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?

4 percent interest, compounded annually

Your parents spent $7,800 to buy 200 shares of stock in a new company 12 years ago. The stock has appreciated 14.6 percent per year on average. What is the current value of those 200 shares?

$40,023.03 $7,800 x(1 + .146)12 = $40,023.03

Today, you deposit $2,500 in a bank account that pays 3.6 percent simple interest. How much interest will you earn over the next 5 years?

$450.00

Ben invested $7,500 twenty years ago with an insurance company that has paid him 6 percent simple interest on his funds. Charles invested $7,500 twenty years ago in a fund that has paid him 6 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?

$7,553.52

Your grandparents just gave you a gift of $6,500. You are investing this money for 6 years at 4 percent simple interest. How much money will you have at the end of the 6 years?

$8,060

Eleven years ago, you deposited $3,200 into an account. Seven years ago, you added an additional $1,000 to this account. You earned 9.2 percent, compounded annually, for the first 4 years and 5.5 percent, compounded annually, for the last 7 years. How much money do you have in your account today?

$8,073.91 {[$3,200 x(1 + .092)4] + $1,000} x(1 + .055)7 = $8,073.91

Kevin just deposited $13,000 into his savings account at Traditions Bank. The bank will pay .87 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 5 years?

$9.93

What is the future value of $5,700 invested for 18 years at 9 percent compounded annually?

. $26,887.59 $22,500 x(1 + .047)6 = $29,638.94

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?

. $34,747.80 = $5,500 x(1 + .092)13 x(1 + .06)(25-13) = $34,747.80

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

12 years

Angela has just received an insurance settlement of $22,500. She wants to save this money until her daughter goes to college. If she can earn an average of 4.7 percent, compounded annually, how much will she have saved when her daughter enters college 6 years from now?

29,638.94

When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.3percent. Today, the account is valued at $42,856. How old are you?

64.91 years $42,856 = $1,500 x(1 + .053)t t = 64.91 years

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

8 percent interest for 9 years

Which one of the following will increase the present value of a lump sum future amount to be received in 15 years?

A decrease in the interest rate

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:

Kurt will have a larger account value than Stacey will.

Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?

PV = $600 / (1 + .05)6

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

PV = $600/(1 + .07)6

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?

Present value

Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest

Which one of the following is a correct statement, all else held constant?

The future value is directly related to the interest rate.

Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future. Which one of the following statements is correct?

The period of time she has to wait decreases as the amount she invests increases.

Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:

compound interest.

All else held constant, the future value of a lump sum investment will decrease if the:

interest is changed to simple interest from compound interest.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:

compounding.

The interest rate used to compute the present value of a future cash flow is called the:

discount rate.

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

discounted cash flow valuation

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

discounting.

Lew has $3,600 that he wants to invest for 5 years. He can invest this amount at his credit union and earn 2.2 percent simple interest. Or, he can open an account at Compass Bank and earn 2.15 percent interest, compounded annually. If he decides to invest at Compass Bank for 5 years, he will:

earn $8 more than if he had invested with his credit union.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

future value.

The future value of a lump sum investment will increase if you:

increase the time period.

The present value of a lump sum future amount:

increases as the interest rate decreases.

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Northern Bank.