Question

1. Interest compounding:

Select one:

a. calculates the present when the future is known

b. calculates interest periodically

c. results in less interest than simple interest

d. is done only once a year

2. Present value is best defined as:

Select one:

a. the amount that must be invested per year and compounded at a specified rate and time to reach a specified present value

b. the amount of a specified future value compounded at a specified rate which can be invested currently

c. all of these are appropriate definitions for present value

d. the amount that must be invested now and compounded at a specified rate and time to reach a specified future value

3. The effective rate is:

Select one:

a. the stated rate

b. the simple rate

c. the true annual rate

d. the true semiannual rate

4. Present value does not:

Select one:

a. find the present dollar amount

b. know the present dollar amount

c. know the future value

d. use the tables

5. When compounding interest, a common mistake is to add the interest to the:

Select one:

a. present value

b. previous principal

c. original principal

d. future value

6. When interest is added to the principal amount and then interest is calculated on this new amount, the process is called:

Select one:

a. compound interest

b. single interest

c. simple interest

d. present value

7. The term "compounding semiannually" means:

Select one:

a. compounding twelve times a year

b. compounding four times a year

c. compounding twice a year

d. none of these

8. When comparing the same period of time and interest rate used to compute simple interest, compound interest results in:

Select one:

a. increased yield for the investor

b. higher interest charges to the investor

c. all of these occur using compound interest

d. an increased maturity date

9. Angelo wants to make an investment today so that he can have $2700 in a year to buy some new kitchen appliances. How much should he set aside now if he can invest the money at 1.6% annually, compounded annually?

Select one:

a. $2327.59

b. $2647.48

c. $1687.50

d. $2657.48

10. Unlike simple interest, compound interest is never found using a:

Select one:

a. formula

b. 365-day year

c. manual compounding

d. 360-day year

11. Provide an appropriate response. The accumulation phase of an annuity is characterized by:
I. paying money into the fund
II. receiving money from the fund
III. the fund balance may earn compound interest

Select one:

a. III only

b. II only

c. I only

d. both I and III

Answer 1

Interest compounding:

Select one:

a. calculates the present when the future is known

Calculating the present when the future is known is understood as discounting and not compounding.

b. calculates interest periodically

This is the right option. Compounding calculates the interest periodically

c. results in less interest than simple interest

This is wrong as compound interest results in a higher interest value as interest is charged even on the accumulated interest and not just the principal as is the case with simple interest.

d. is done only once a year

There is no compulsion for interest compounding to be done once a year

2)

Present value is best defined as:

a. the amount that must be invested per year and compounded at a specified rate and time to reach a specified present value

It is indeed the amount that must be invested per year and compounded at a specified rate and tme but to reach a final value and not a present value

b. the amount of a specified future value compounded at a specified rate which can be invested currently

IThe present value is compounded to yield the future value and not the other way round as mentioned in the option

c. all of these are appropriate definitions for present value

Option 1 and 2 are wrong. So this option is incorrect

d. the amount that must be invested now and compounded at a specified rate and time to reach a specified future value

This is the only correct option, and it is the right definition of present value, it is a time 0 i.e invested now for a specified time period to reach a specified future value at the end of the time period.

3)

The effective rate is:

a. the stated rate

The stated rate is the nominal rate, it is not adjusted for an annual basis

b. the simple rate

It is not the same as simple rate

c. the true annual rate

The effective rate is another name for equivalent interest rate or effective annual rate.

d. the true semiannual rate

The effective annual rate, as the name signifies is the true annual rate and not the true semi annual rate

4)

Present value does not:

a. find the present dollar amount

It finds the present value

b. know the present dollar amount

It is found from discounting at a given discount rate, present value is not a given or known entity when we are asked to calculate

c. know the future value

We have to know the future value in order to calculate the present value by discounting it at the given discount rate.

d. use the tables

Present value calculation involves using the tables, discount tables

5)

When compounding interest, a common mistake is to add the interest to the:

a. present value

It is not wrong to add the interest to the present value.

b. previous principal

The interest compounded over this period is added to the previous principal.It is not a mistake

c. original principal

The interest compounded has to be added to the previous principal and not the original principal.

d. future value

It is nota mistake to add the interest to a future value, but the 'future value' has a vague implication in this option.

6)

When interest is added to the principal amount and then interest is calculated on this new amount, the process is called:

a. compound interest

This is the correct answer as compound interest is calculated by computing interest on the principal amount and the previous period's interest.

b. single interest

This is not the right definition.

c. simple interest

The interest is added only to the original principal and there is no interest added to any amount. It stays constant every period

d. present value

The present value is found by discounting, not by adding and compounding

7)

The term "compounding semiannually" means:

a. compounding twelve times a year

That would be monthly compounding and not compounding semiannually

b. compounding four times a year

That would be compounding 'quarterly'

c. compounding twice a year

This is correct. Semi annual means 6 months and two periods, which means it will compound twice a year.

d. none of these