Question

Which of the following statements is (are) correct?
(x) The longer money can earn interest, the smaller the present value must be to reach a financial goal.
(y) In the calculation of present values, the higher the interest rate, the smaller the present value will be.
(z) When calculating the number of years needed to grow an investment to a specific amount of money, the higher the interest rate, the shorter the time period needed to achieve the growth.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

6. You plan to invest $2,500 in a money market account which will pay an annual stated (nominal) interest rate of 8.5%, but which compounds interest on a weekly basis. If you leave this money on deposit for one year (52 weeks), what will be your ending balance when you close the account?
A. $2,583.28
B. $2,611.72
C. $2,681.00
D. $2,721.60
E. $2,728.40

7. You can invest $1,000 for 5 years in a low-risk account that earns 5% per year or you can choose a higher-risk account that earns 10% per year. If you select the investment earning 10%,

A. you will double the interest earned of the investment earning 5%.

B. you will more than double the interest earned of the investment earning 5%.

C. your profit will be less than double the interest earned of the investment earning 5%.

D. If both accounts pay the full amount of interest earned, then none of these statements is correct.

8. Suppose you deposit $750 into your bank account today. If the bank pays 7.0 percent per year, then which of the following statements is (are) correct? (Hint: use Excel to create a template that will allow you to do all FV questions quickly and easily.)
(x) $1,501.20 is in your account after 10 years if interest is compounded quarterly but only $1,475.36 if the interest is compounded annually.
(y) You will earn an additional $16.98 of interest in your account after 10 years if interest is compounded semi-annually instead of annually, but $14.91 less interest if interest is compounded semi-annually instead of monthly.
(z) Although compounding daily instead of weekly will only add an additional $0.61 after 10 years, compounding daily instead of annually will add an additional $34.85.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only E. (x) only

9. Martha and George are the same age. At age 25, Martha invests $10,000 that earns 6.14 percent each year. At age 33, George invests $10,000 that earns 8.45 percent per year. Who has more money at age 55?

A. Both yield the same amount at age 55.

B. Martha, whom at age 25 invests $10,000 at 6.14 percent.

C. George, whom at age 28 invests $10,000 at 8.45 percent.

D. There is not enough information to determine which case earns the most money at age 55.

10. A deposit of $525 earns the following interest rates: 4 percent in the first year, 5 percent in the second year, and 6 percent in the third year and7 percent in the fourth year. What would be the fourth year future value? A. $635.16
B. $639.08
C. $644.16
D. $650.24
E. $652.85

Answer 1

5. A. (x), y and z are correct

6. Considering there are 52 weeks in a year.

Weekly interest rate= 8.5%/52=0.1635%

Annual effective interest rate= (1+0.1635%)^52-1=8.87%

So, value of money after 1 year= 2500*(1+8.87%)=$2721.658

So, option D is correct.

7. Option A is correct.

8.

Calculation of future value when compounded yearly,quarterly,monthly,weekly or daily are given below:

	Annual	SemiAnnual	Quarterly	Monthly	Weekly	Daily
Effective Rate	7.00%	7.12%	7.19%	7.23%	7.25%	7.25%
PV	750	750	750	750	750	750
Tenure (nper)	10	10	10	10	10	10
FV	($1,475.36)	($1,492.34)	($1,501.20)	($1,507.25)	($1,509.60)	($1,510.21)

Difference of Annual and quarterly interest	$25.83	Statement x is correct
Difference of Annual and semi annual interest	$16.98
Difference of semi-annual and monthly interest	$14.90	Statement y is correct
Difference of weekly and daily interest	$0.61
Difference of annual and daily	$34.85	Statement z is correct

Option A is correct.

9. For Martha value of money at age 55= 10000*(1+6.14%)^(55-25)=$59754.76

For George value of money at age 55=10000*(1+8.45%)^(55-33)=$59573.11

Option B is correct

10. Value of money at the end of 4 year=525*1.04*1.05*1.06*1.07=$650.24

So, Option D is correct