HDFS 2483 --- CHAPTER 4

Marie will be receiving $300 per year for the next six years. The interest on the account is 5%, compounded annually. What is the present value of this annuity? Answers are rounded to whole dollars.

$1,523

What would be the APY on a certificate of deposit that paid 3% compounded quarterly?

3.03% (reason: (1 + 0.03/4)^4-1)

Samantha is trying to decide between two investments. The first one will earn 5% simple interest annually. The second investment will earn 5% compounded quarterly. Assuming they have the same amount of risk, which is the better investment?

5% compounded quarterly

What is the current value of a future amount based on a certain interest rate and a certain time period?

Present value

Paul needs to have $200 in two years. The interest earned on the account is 4%, compounded annually. How much does he need to invest today?

$185

Paul invested $185. The interest earned is 4%, compounded annually. At the end of two years, Paul will have about:

$200

Sam has an investment of $200 that is expected to earn 10%. How much will the investment be worth at the end of the first year if the investment earns simple interest?

$220

Phillip has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the second year if the investment earns simple interest compounded annually?

$242

If you deposit $500 per year in an account for six years at 5%, how much will you have in the account? Round your answer to the nearest dollar.

$3,401

Paula needs to have $400 in three years. The interest earned on the account is 6%, compounded annually. How much does she need to invest today?

$336

Paula invested $370. The interest earned is 4%, compounded annually. At the end of two years, Paula will have about:

$400

If you deposit $500 per year in an account for nine years at 6%, how much will you have in the account? Round your answer to the nearest dollar.

$5,746

Simon will be receiving $200 per year for the next five years. The interest on the account is 5%, compounded annually. What is the present value of this annuity?

%866

What measures the increase in an amount of money as a result of interest earned?

Time value of money

When equal payments are received at the beginning of a period it is referred to as a (n) _____ _____.

annuity due

When interest is added to an initial deposit and you begin to earn interest on the interest already accumulated, it is called ____

compounding

Another name used for calculating present value is ______. Compounding is the other term for future value.

discounting

True or False: The APR takes into account the compounding of interest within the year.

false

What are some of the methods that can be used to compute time value of money?

financial calculator Spreadsheet software formula calculation

The amount to which current savings will increase based on a certain interest rate and a certain time period is called:

future value

A series of equal deposits or payments made at the end of a period is called a(n):

ordinary annuity

Two of the best ways to accumulate wealth are:

paying yourself first start saving early in life

Another name used for discounting is:

present value

To calculate time value of money, the following items are needed:

principal amount length of time annual interest rate

The principal that a dollar now is worth more than a dollar in the future when considering interest earned is know as the ____ value of money

time

Considering the potential to earn interest, a dollar today is worth more than a dollar tomorrow.

true

True or false: Three items needed to calculate future value include: principal, length of time, annual interest rate.

true

The annual percentage ____ is the effective yearly interest rate that takes compounding into consideration.

yield

The annual percentage _____ takes into account compounding effects intra-year.

yield