Chp. 5 hw

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

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. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

5.61%

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5% annual interest until you have accumulated $50,000. How many years from today will it be when this occurs?

54.77 years

Sam just opened a savings account paying 3.5% interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Give this, Sam:

Could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Interest on interest

When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit?

$20,468.85

At 5% interest, how long would it take to triple your money?

22.52 years

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound interest

Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22%. For this to be true, what was the original price of the comic book in 1954?

$1.12

Friendly Companies has an unfounded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24%?

$124,147,723.50

You will receive $15,000 in two years when you graduate. You plan to invest this at an annual interest rate of 6.5 percent. How much will you have 8 years from now?

$21,887.13

Travis invested $8,000 in an account that pays 4% simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

$287.45

This morning, DJ's invested $225,000 help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4% rather than 3.5%?

$3,632.88

What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?

$38,125.20

You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7%. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years?

$4,117.64

Al invested $3,630 in an account that pays 6% simple interest. How much money will he have at the end of five years?

$4,719

Twenty years from now, you want to spend $175,000 on a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6%?

$48,740.95

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%. How much will your dream car cost by the time you are ready to buy it?

$72,103.59

You own a classic car currently valued at $64,000. If the value increases by 2.5 percent annually, how much will the car be worth 15 years from now?

$92,691.08

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8%?

$959.46

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

Barb will earn more interest in Year 2 than Andy.

Which one of these will increase the present value of a set amount to be received sometime in the future?

Decreases in the interest rate

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

Discount rate

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

Discounting

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future value

Philippe invested $1,000 ten years ago and expected to have $1,800 today. He has neither added nor withdrawn any money since his investment. All interest was reinvested and compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

He earned a lower interest rate than he expected.

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

Increase

You goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make on lump sum deposit today. If you plan to retire ___ rather than ____ and earn a _____ rate of interest, then you can deposit a smaller lump sum today.

Later; sooner; high