Chapter 5&6 Part 1 Study Set

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years? A.$33,588 B. $408,671 C. $106,905 D. $159,654 E. $404,305

$33,588

What is interest on interest

interest earned on the reinvestment of previous interest payments

What is simple interest?

money you earn from keeping money in the bank over time

Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest? $14,929.00 $16,500.00 $15,994.70 $14,929.29 $16,500.93

$15,994.70

Sixty years ago, your grandmother invested $4,500. Today, that investment is worth $430,065.11. What is the average annually compounded rate of return she earned on this investment? 6.67% 11.71% 7.90% 10.40% 12.02%

7.90%

All else constant, which one of the following will result in the lowest present value of a lump sum? 6 percent interest for 5 years 6 percent interest for 8 years 6 percent interest for 10 years 8 percent interest for 5 years 8 percent interest for 10 years

8 percent interest for 10 years

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn? 8.27% 9.01% 99.96% 109.01% 9.65%

9.01%

Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025? $13,611.18 $18,987.56 $14,122.01 $11,218.27 $14,077.16

$14,077.16

What is the Rule of 72? How is it calculated?

The Rule of 72 is a quick way to calculate the length of time it will take to double a sum of money. Divide 72 by the expected interest rate to determine the number of years it will take your money to double.

Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct? A. The interest you earn in Year 7 will equal the interest you earn in Year 14. B. The interest amount you earn will double in value every year. C. The total amount of interest you will earn will equal $6,000 × .08 × 48. D. The present value of this investment is equal to $6,000. E. The future value of this amount is equal to $6,000 × (1 + 48).08.

The present value of this investment is equal to $6,000.

What is the future value in 60 years of $7,440 invested today at 9 percent interest, compounded annually? $1,309,673 $1,314,038 $38,256 $91,006 $14,469,253

$1,309,673

Your cousin deposited $2,500 today at 6.5 percent interest for 15 years. However, you can only earn 6.25 percent interest. How much more money must you deposit today than your cousin invested if you are to have the same amount saved at the end of the 15 years? (Assume annual compounding on both accounts.) $92.19 $89.70 $88.78 $90.21 $93.39

$89.70

3. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transaction costs.) The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. Because the outstanding balance declines over time, the monthly payments will also decline over time. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. The proportion of the monthly payment that goes toward repayment of principal will be lower 10 years from now than it will be the first year. The outstanding balance declines at a faster rate in the later years of the loan's life.

The outstanding balance declines at a faster rate in the later years of the loan's life.

Which of the following statements is CORRECT? A timeline is not meaningful unless all cash flows occur annually. Timelines are not useful for visualizing complex problems prior to doing actual calculations. Timelines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. Timelines can be constructed for annuities where the payments occur at either the beginning or the end of the periods Some of the cash flows shown on a timeline can be in the form of annuity payments, but none can be uneven amounts.

Timelines can be constructed for annuities where the payments occur at either the beginning or the end of the periods

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav: A. will earn the same amount of interest each year for four years. B. will earn simple interest on his savings every year for four years. C. could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. D. has an account currently valued at $5,000. E. Could earn more interest on this account if the interest earnings were withdrawn annually.

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

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, compounded annually. How much money will you have 8 years from now? $24,824.94 $19,381.16 $21,887.13 $23,209.19 $20,414.73

$21,887.13

Werden's Workshop invested $225,000 today to 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 percent rather than 3.5 percent? (Assume annual compounding.) $3,391.90 $3,632.88 $3,008.17 $4,219.68 $3,711.08

$3,632.88

In 1903, the winner of a competition was paid $50. In 2020, the winner's prize was $235,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Do not round intermediate calculations. Round your answer to the nearest $500.) $1,043,378 $997,188 $954,327 $975,678 $983,534

$997,188

On your tenth 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? Age 20 Age 31 Age 30 Age 23 Age 21

Age 31

According to the Rule of 72, you can do which one of the following? Approximately double your money in five years at 7.24 percent interest Double your money in 7.2 years at 8 percent interest Approximately double your money in 11 years at 6.55 percent interest Triple your money in 7.2 years at 7.2 percent interest Approximately triple your money in 7.2 years at 10 percent interest

Approximately double your money in 11 years at 6.55 percent interest

Which one of the following actions will increase the present value of an amount to be received sometime in the future? A. Increase in the time until the amount is received B. Increase in the discount rate C. Decrease in the future value D. Decrease in the interest rate E. Decrease in both the future value and the number of time periods

Decrease in the interest rate

Jared 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: A. Free Interest B. Bonus Income C. Simple Interest D. Interest on Interest E. Present Value Interest

Interest on Interest

Which of the following statements is CORRECT? The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. To calculate present value, one needs to compound all the cash flows to the future. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Qiaochu purchased a parcel of land costing $67,900. Today, that land is valued at $64,800. How long has she owned this land if the price has been decreasing by 1.5 percent per year? 3.33 years 2.48 years 3.09 years 2.97 years 2.08 years

3.09 years

This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true? A. Jayda will earn more interest in Year 1 than Clayton will earn. B. Clayton will earn more interest in Year 3 than Jayda will earn. C. Jayda will earn more interest in Year 2 than Clayton will earn. D. After five years, Clayton and Jayda will both have earned the same amount of interest. E. Clayton will earn compound interest.

Jayda will earn more interest in Year 2 than Clayton will earn.

You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. The prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent, compounded annually. What is the present value of your winnings? $11,288.16 $9,300.82 $10,309.91 $8,333.33 $10,500.00

$9,300.82