Financial Management Chapter 5

This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true? A. Jayda will earn more interest in Year 1 than Clayton will earn. B. Clayton will earn more interest in Year 3 than Jayda will earn. C. Jayda will earn more interest in Year 2 than Clayton will earn. D. After five years, Clayton and Jayda will both have earned the same amount of interest. E. Clayton will earn compound interest.

C. Jayda will earn more interest in Year 2 than Clayton will earn.

Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60: A. Sophia will have less money when she retires than Mallory. B. Mallory will earn more interest on interest than Sophia. C. Mallory will earn more compound interest than Sophia. D. They must wait 10 more years to have equal amounts of savings. E. Sophia will have more money than Mallory.

E. Sophia will have more money than Mallory.