Bus.Finance Ch.3&4
Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?
$45.75 Future value Western=$6,000+($6,000 × .05 × 3)=$6,900Future value Western=$6,000+($6,000 × .05 × 3)=$6,900 Future value Eastern=$6,000×(1 + .05)3=$6,945.75Future value Eastern=$6,000×(1 + .05)3=$6,945.75 Difference = $6,945.75 − 6,900 = $45.75
When you were born, your parents opened an investment account in your name and deposited $1,500 into the account. The account has earned an average annual rate of return of 5.5 percent. Today, the account is valued at $42,856. How old are you?
62.61
You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value?
8 years Approximate time period = 72 ÷ 9 = 8 years
At 12.5 percent interest, how long does it take to triple your money?
9.33
At 12.5 percent interest, how long does it take to triple your money?
9.33 yrs
You have $300 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?
24.57 $900 = $300 × (1 + r)5raise to the power of 5 r = .2457, or 24.57%
You have $300 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?
24.57% $900 = $300 × (1 + r)5raise to the power of 5 r = .2457, or 24.57%
You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?
25925.58
You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal? Multiple Choice
25925.58
Stephen claims that he invested $2,200 six years ago and that this investment is worth $10,500 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually.
29.76
Stephen claims that he invested $2,200 six years ago and that this investment is worth $10,500 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounded annually.
29.76%
Your grandparents just gave you a gift of $3,000. You are investing this money at 3 percent simple interest. How much money will you have at the end of the 10 years?
3900 Future value = $3,000 + ($3,000 × .03 × 10) = $3,900
Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?
4 percent interest, compounded annually
Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?
4% interest, compounded annually
Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?
45.75
Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?
6.5 % simple interest
Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?
6.5 percent simple interest
Suppose that in 2015, a $10 silver certificate from 1898 sold for $17,100. For this to have been true, what would the annual increase in the value of the certificate have been?
6.57
Suppose that in 2015, a $10 silver certificate from 1898 sold for $17,100. For this to have been true, what would the annual increase in the value of the certificate have been?
6.57%
The interest rate used to compute the present value of a future cash flow is called the
discount rate
The interest rate used to compute the present value of a future cash flow is called the:
discount rate
Calculating the present value of a future cash flow to determine its worth today is commonly called:
discounting cash flow valuation
Calculating the present value of a future cash flow to determine its worth today is commonly called:
discounting cash flow valuation.
Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?
13.99%
Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?
13.99% $325,000 = $40,000 × (1 + r)16raise to the power of 16 r = .1399, or 13.99%
You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3?
1540.29
Adirondack Corporation will need $1.75 million 3 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 2.75 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?
1613216.13
Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?
Present Value
Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?
She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest
Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?
She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest.
Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?
present value
