Question

1. You invest $20000 in a 7-year certificate of deposit (CD) that pays 5.2% interest, compounded annually. How much money will you have when the CD matures?

a. 29140

b. 27280

c. 23670

d. 28520

2. Which of the following statements is most likely correct?

a. A perpetuity is an infinite stream of payments in varying amounts occurring at regular or irregular time intervals.

b. The cash flows for an annuity do not have to be equal, but they must occur at regular intervals.

c. An ordinary annuity has the first payment occurring one period from now, while an annuity due has the first payment occurring now.

d. Time periods that can be used in the time value of money computations are restricted to months and years.

Answer 1

The solution to Question 1

Interest charged on the principal amount and the interest accrued is known as Compound Interest. It is also known as Interest on interest.

It is calculated as:

Where Amount denotes the Total Sum on maturity

C denotes the Principal amount or $ 20,000

r denotes the rate of interest or 5.2% annually

n denotes the Number of compounding periods or 7

Substituting the values, calculate the Amount:

The amount on maturity is $ 28,519.39 or $ 28,520 (rounded off to nearest cent)

Thus, choose Option D.

The solution to Question 2

An Annuity is a series of payments of fixed amounts and at fixed intervals.

These can be of two types:

• Ordinary Annuity – payment is made at the end of each period.
• Annuity Due – payment is made at the beginning of each period.

Thus, Statement C is correct.