Financial management Final Prep
Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as: A. compounding. B. simplifying. C. accumulating. D. aggregating. E. discounting.
Answer: A. Compounding
The interest earned on both the initial principal and the interest reinvested from prior periods is called: A. simple interest. B. dual interest. C. free interest. D. interest on interest. E. compound interest.
Answer: E. Compound Interest
Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years? A. $5,056 B. $4,678 C. $4,910 D. $4,719 E. $5,299
3,630 + 5(3630 * .06) =4719 Answer: D. $4,719
You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it? A. $69,023.16 B. $72,103.59 C. $73,340.00 D. $66,818.02 E. $68,666.67
FV= PV (1 + r)^t FV= 62500 (1 + .029) ^5 = 72103.59 Answer: B. $72,103.59
On your tenth (10th) birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? A. Age 30 B. Age 20 C. Age 31 D. Age 23 E. Age 21
FV=PV*(1+r)^t FV= $756 PV=amount received on tenth birthday=$300 r=interest rate on investment=4.5% N=number of years between tenth birthday and today=unknown $756=$300*(1+4.5%)^t $756/$300=(1.045)^t 2.52=(1.045)^t take log of both sides ln(2.52)=t ln(1.045) t=ln(2.52)/ln(1.045) t=21 Age today=N+10 years Age today=21+10 Age today=31 years Answer: C. 31 years old
You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. A. $1,219.02 B. $891.18 C. $945.11 D. $1,256.43 E. $1,124.60
If the deposit made today earns 2.50% on the savings FV = PV (1+r)^t $30,000 = PV / (1 + 0.025)^5 PV = $30,000 x 1/ (1+ 0.025)^5 PV = $26,515.63 If the deposit made today earns 3.50% on the savings FV = PV (1+r)^t $30,000 = PV (1+0.035)^5 PV = $30,000 x 1/ (1+0.035)^5 PV = $25,259.20 So, the amount less to be deposited today to reach this goal = $26,515.63 - $25,259.20 = $1,256.43
You need $50,000 in 10 years. If you can earn 6% interest, how much do you need to invest today? A. $27,919.74 B. $27,939.74 C. $27,929.74 D. $27,959.74 E. $27,949.74
PV=FV *(1/(1+r)^t PV= 50,000 *(1/(1+.06)^10 Answer: A. $27,919.74
Which one of the following will produce the lowest present value interest factor? A. 6 percent interest for 8 years B. 6 percent interest for 10 years C. 6 percent interest for 5 years D. 8 percent interest for 10 years E. 8 percent interest for 5 years
Present value = future value X (1/(1+interest rate)^time) The present value interest factor is (1/(1+interest rate)^time) 1/((1+8)^10) = .4632 Answer: D. 8 percent interest for 10 years
Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What rate of interest must you earn to cover the cost of your child's college education? A. 5.79 percent B. 5.61 percent C. 6.81 percent D. 5.50 percent E. 6.25 percent
R=((FV/PV)^1/t) -1 r=((245,000/108,000)^1/15) -1 =0.0561 Answer: B. 5.61 percent
At 5 percent interest, how long would it take to triple your money? A. 24.87 years B. 25.64 years C. 20.01 years D. 26.55 years E. 22.52 years
Ratio of PV to FV is 1:3 PV=1 FV= 3 r= 5% t= ? Time = ln( 3/1) / ln(1+.05) = 22.517 Answer: E. 22.52 years