FINAN 450 Mini Exam Study guide

Thomas invests $117 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years?

$145.08

You need to have $30,000 for a down payment on a house 8 in years. If you can earn an annual interest of 4.4 percent, how much will you have to deposit today?

$21,257.75

5 years from today you plan to invest $2,650 for 6 additional years at 5.1 percent compounded annually. How much will you have in your account 11 years from today?

$3,571.59

Bob bought some land costing $16,040. Today, that same land is valued at $46,117. How long has bob owned this land if the price of land has been increasing at 4 percent per year?

26.93

Rick deposited $3,150 into an account 8 years ago for an emergency fund. Today that account was worth $4,290. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals?

3.94 percent

You made an investment of $11,000 into an account that paid you an annual interest rate of 3.4 percent for the first 8 years and 7.8 percent for the next 12 years. What was your annual rate of return over the entire 20 years?

6.02 percent

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

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

compounding

The present value of a lump sum future amount

increases as the interest rate decreases

A dollar today is worth more than a dollar tomorrow so rational investors require interest. Interest compensates for:

the lost opportunity to invest the dollar to earn the risk free rate, loss of purchasing power and uncertainty risk