BUS 121 - Chpt 12 Smartbook

Compound interest results in ______ interest over time than simple interest.

Higher/Greater

Consider which option results in a higher effective rate. Bank A offers 4% compounded annually. Bank B offers 4% compounded quarterly.

Bank B Bank B's effective rate is 4.06%. 4% quarterly pays 1% four times per year. 1^4 = 4.06%.

Continuous compounding results in ______ interest than daily compounding.

more

Compounding goes from ______ value to ______ value.

present future

Step 2 in calculating present value by table lookup is to find the ______

rate

Feliz borrowed $2,000 for 5 years at 6%. Using the simple interest formula, how much will he need to pay at the end of the loan?

$2,600 The maturity value is the principal plus the interest. $2,000 × 6% × 5 years= $600 + $2,000 = $2,600

Wright invested $500 at 7% compounded daily for 6 years. What is the future value of his investment? Use the compounded daily table, 360-day basis.

$760.95 N = 6; i = 7%. $500 × 1.5219 = $760.95.

Given principal of $100 and a rate of 10%, match the number of years to the amount of interest earned using simple interest.

1 year - $10 2 years - $20 3 years - $30

Order the steps in calculating the compound amount and interest manually.

1. Calculate the simple interest and add it to the principle. Use this total for the next year. 2. Repeat the calculation of the simple interest plus the principal for the total number of periods. 3. Compound amount - Principle = Compound Interest

Order the steps for calculating the compound amount using the table.

1. Find the number of periods 2. Find the rate 3. Find the intersection of the number of periods and the rate in the table 4. Multiply the table factor by the amount of the loan

$1 is compounded semiannually for 5 years at 2% interest. How many periods will this result in?

10 Semiannual compounding results in twice a year. Therefore, 2 × 5 years = 10 periods.

$1 is compounded annually for 3 years at 24% interest. What is the interest rate per period?

24% 24% ÷ 1 = 24%.

You compound $1 for 3 years at 4% interest. Match the number of periods to the respective compounding periods

3 - Annual 6 - Semiannually 12 - Quarterly 36 - Monthly

When interest is compounded quarterly, interest is calculated how many times per year?

4

$1 is compounded semiannually for 10 years at 8% interest. What is the interest rate per period?

4% 8% ÷ 2 (semiannual) = 4%.

Determine the effective rate of $1 invested at 6% compounded semiannually.

6.09% Table value of 1.0609 × $1 = maturity value of $1.0609. Subtract the principal to find the interest of $.0609. Interest for one year of $.0609 ÷ principal of 1 = 6.09% is the effective or actual rate, also known as the annual percentage yield.

Given the equation, A = P(1 + i)^N, match the abbreviation to the respective compounding term

i - rate per period A - compound amount N - number of periods P - principal

True or false: The APY (annual percentage yield) is different from the effective rate.

False Banks use the APY and the effective rate interchangeably.

Which compounding term results in the most number of times that the interest is calculated in a year?

Monthly

True or false: You can use the present value tables to check your work by reversing the future value table.

Once you find the present value of a future number, you can use the future value table to extend the present value figure into the future.

Present value table factors are numbers _______ than 1.

less

Present value answers the question, "How much do I need to invest _______ for it to grow to $1 in the future?".

Today

Cheng deposited $800 in a savings account for 4 years with a 6% annual compounding rate. Match the compounding year to the interest earned.

Year 1 - $48.00 Year 2 - $50.88 Year 3 - $53.93

Compound interest is the interest on ______.

earned on both the original principal and the interest earned

Compounding calculates the ______ value of a dollar today.

future

Present value starts with what an item is worth in the ______ and calculates what that item is worth in the ______.

future, present PV starts with what an item is worth in the future and calculates what that item is worth in the present.

Future value table factors are numbers (greater/less) ______ than 1.

greater