Deck 12: Compound Interest and Present Value

Question 1

A compound table factor of 1.2950 means that $1 at a certain rate of interest for a certain period of time will increase in value to approximately $1.30.

Answer 1

True

Question 2

The effective rate (APY) can be calculated by the interest for one year divided by the principal.

Answer 2

True

Question 3

The annual rate a bank advertises is the same as the effective rate.

Answer 3

False

Question 4

Effective rates can be seen in the compounding table for one dollar.

Question 5

Compound value = $ amount divided by table factor.

Question 6

The number of periods for a table lookup on $5,000 at 12% compounded semiannually for 10 years is 10 periods.

Question 7

The table for the compound value of $1 has only table factors over $1.00.

Question 8

Annual means compounded once a year.

Question 9

The interest on $3,000 at 8% compounded semiannually for six years by using the table lookup (use table in handbook) is $1,803.

Question 10

The number of periods in compounding is found by multiplying the number of years times the number of times compounded per year.

Question 11

The rate to be used in compounding is found by taking the annual rate divided by the number of times compounded per day.

Question 12

Compounding always requires the use of tables.

Question 13

The rate for a table lookup on a $4,000, 12% investment compounded quarterly for four years is 4%.

Question 14

Interest = principal × rate divided by the time.

Question 15

Using the table in the handbook, the table factor for compounding $4,000 at 9% compounded annually for one year is 1.0900.

Question 16

The nominal rate is really the true rate.

Question 17

Compounding always reduces the principal.

Question 18

Interest calculated on a balance every three months is said to be compounded quarterly.

Question 19

Compounding results in earning higher interest than simple interest.

Question 20

Compounding looks into the present when we know what we have in the future.

Question 21

The interest on $6,000 at 6% compounded semiannually for eight years is (use table in the handbook):

A) $3,628.20
B) $3,682.02
C) $362.82
D) $13,628.20
E) None of these

Question 22

A table factor of .7312 from a present value table of $1 means that a certain rate of interest for a certain period of time will equal:

A) $1
B) Over $1
C) Less than $1
D) Never equal
E) None of these

Question 23

In tables for calculating compound interest, the number of periods is equal to:

A) Number of years divided by rate
B) Number of years × rate
C) Number of years × number of times compounded per year
D) Number of years divided by number of times compounded per year
E) None of these

Question 24

Using the table in the handbook, the present value of $12,000 for six years compounded at 6% semiannually is:

A) $12,814.08
B) $8,461.08
C) $8,416.80
D) $8,614.80
E) None of these

Question 25

Using the table in your handbook, $6,000 for six years at 8½% compounded daily will grow to:

A) $8,991.02
B) $8,950.10
C) $9,991.20
D) $9,990.02
E) None of these

Question 26

$14,182 is the present value of $21,000 that earns at a bank 12% compounded quarterly for four years. (Use table in handbook.)

Question 27

The compound table can be used to prove a present value calculation.

Question 28

Using the table in handbook, the value of $60 deposited in a bank for six years at a rate of 10% compounded annually is:

A) $96.63
B) $96.36
C) $106.30
D) $106.03
E) None of these

Question 29

In the table of present value of one dollar, all table factors are less than $1.

Question 30

Compounding:

A) Calculates interest periodically
B) Looks into the present when the future is known
C) Is done only on an annual basis
D) Results in less interest than simple interest
E) None of these

Question 31

$20,000 for 14 years compounded at 8% semiannually results in how many periods?

A) 64
B) 28
C) 12
D) 14
E) None of these

Question 32

Effective rate (APY) is:

A) Never related to compound table
B) Interest for one year divided by annual rate
C) Interest for one year divided by principal for two years
D) Interest for one year divided by principal
E) None of these

Question 33

$100,000 for 20 years compounded at 4% annually results in a rate per period of:

A) 3%
B) 5%
C) 4%
D) 1%
E) None of these

Question 34

A table factor of .7513 from a present value table means that if $.75 is invested at a certain rate of interest for a certain number of periods, it would be worth $1 in the past.

Question 35

Compounding interest daily is seldom used in comparison to compounding once a year.

Question 36

The rate used in the table for calculating compound interest is found by:

A) Annual rate × number of periods
B) Annual rate × number of times compounded per year
C) Annual rate divided by number of times compounded per year
D) Annual rate divided semiannually
E) None of these

Question 37

Present value does not:

A) Know future amount
B) Know the present dollar amount
C) Find present dollar amount
D) Use tables
E) None of these

Question 38

The effective rate (APY) is:

A) The nominal rate
B) The stated rate
C) The true semiannual rate
D) The true annual rate
E) None of these

Question 39

Present value starts with the future and tries to calculate its worth in the present.

Question 40

Using the interest for daily compounding (in your handbook), $700 would grow to $790 at the end of three years at 8% interest.

Question 41

Molly Scupper wants to attend Clarke University. She will need $90,000 eight years from today. Assume Molly's bank pays 6% interest compounded quarterly. What must Molly deposit today to have $90,000 in eight years? Verify your answer.

Question 42

Joe Diamond deposited $9,000 into the Rong Bank, which pays 12% interest, compounded quarterly. Calculate the amount Joe will have in his account at the end of four years.

Question 43

Katie Hector wants to purchase a condo in Oxford, MS, in 20 years. The cost of the condo is expected to be $180,000. Assuming she can earn 6% annually, what should Katie deposit today?

A) $126,900
B) $56,124
C) $89,400
D) $180,000
E) None of these

Question 44

Sam Monte deposits $21,500 into Legal Bank, which pays 6% interest that is compounded semiannually. Using the table in the handbook, what will Sam have in his account at the end of six years?

A) $29,760.30
B) $30,654.70
C) $30,456.07
D) $29,670.03
E) None of these

Question 45

Mia Kaminsky wants to attend Riverside Community College. She will need to have $25,000 six years from today. Mia is wondering what she will have to put in the bank today so that she will have $25,000 six years from now. Her bank pays 5% compounded semiannually. Using the tables in the handbook, the amount Mia will have to deposit is:

A) $18,950
B) $33,226
C) $18,590
D) $33,622
E) None of these

Question 46

Anne Katz, the owner of Katz Sport Shop, lends $8,000 to Shelley Slater to help her open an art shop. Shelley plans to repay Anne at the end of eight years with interest compounded semiannually at 8%. At the end of eight years, Anne will receive (use the tables in the handbook):

A) $14,984
B) $16,857
C) $16,587
D) $14,484
E) None of these

Question 47

Jane is having difficulty deciding whether to put her savings in the Mystic Bank or in the Four Rivers Bank. Mystic offers a 12% rate compounded quarterly, and Four Rivers offers 14% compounded semiannually. Jane has $40,000 to invest and expects to withdraw the money at the end of five years. (Use the tables in the handbook.) The best deal is:

A) Four Rivers
B) Four Rivers for first two years
C) Mystic
D) Mystic for last two years
E) None of these

Question 48

Kathy Crag, the owner of The Fabric Corner, lent $15,000 to Dani Flynn to open her own card shop. Dani plans to repay Kathy at the end of 12 years with 8% interest compounded quarterly. How much will Kathy receive at the end of 12 years?

Question 49

Earl Miller deposited $25,000 at Y Bank at an interest rate of 12% compounded quarterly. (Use the tables in the handbook.) The effective rate (APY) is:

A) 12%
B) 12.55%
C) 12.15%
D) 13.2%
E) None of these

Question 50

Lisa Richter deposited $5,000 at 4% compounded semiannually for three years. At the beginning of the fourth year, Lisa deposited $2,500. What would her balance be at the end of five years assuming she is still earning 4% compounded semiannually?

A) $5,131
B) $8,131
C) $8,800
D) $8,800.99
E) None of these

Question 51

Al Miler, the owner of Al's Garage, estimates that he will need $29,000 for new equipment in 15 years. Al decides that he will put aside the money now so that in 15 years the $29,000 will be available. His bank offers him 10% interest compounded semiannually. (Use the tables in the handbook.) Al must invest today:

A) $6,710.60
B) $6,942.60
C) $6,701.60
D) $125,335.10
E) None of these

Question 52

Burton Bush wants to retire in Arizona when he is 80 years of age. Burton, who is now 55, believes he will need $400,000 to retire comfortably. To date, he has set aside no retirement money. If he gets an interest rate of 6% compounded annually, he will have to invest today (use the tables in the handbook):

A) $92,300
B) $69,900
C) $96,500
D) $93,200
E) None of these

Question 53

Jim Moore opens a new savings account. He deposits $12,000 at 12% compounded semiannually. At the start of the fourth year, Jim deposits an additional $50,000 that is also compounded semiannually at 12%. At the end of six years, the balance in Jim Moore's account is (use the tables in the handbook):

A) $66,081.20
B) $50,000.00
C) $16,081.20
D) $88,555.42
E) None of these

Question 54

Interest on $2,630 at 3% compounded semiannually for five years is:

A) $304.90
B) $414.49
C) $569.92
D) $418.96
E) None of these

Question 55

Merle Fonda opened a new savings account. She deposited $40,000 at 10% compounded semiannually. At the start of the fourth year, Merle deposits an additional $20,000 that is also compounded semiannually at 10%. At the end of six years, the balance in Merle's account is (use the tables in the handbook):

A) $73,604.00
B) $53,604.00
C) $80,406.00
D) $98,636.72
E) None of these

Question 56

Pete Sist wants to buy a new Chevrolet in five years. He estimates the car will cost $24,000. Assuming Pete invests $15,000 now at 10% interest compounded semiannually, will he have enough money to buy the car at the end of five years?
He will have $24,433.50; yes

Question 57

Trisha Long wants to buy a boat in five years. She estimates the boat will cost $15,000 at that time. What must Trisha deposit today in an account earning 5% annually to have enough to buy the boat in five years?

A) $12,328.50
B) $11,527.50
C) $11,752.50
D) $11,077.50
E) None of these

Question 58

Ellen deposits $6,773 into an account earning 1% annually. After seven years what will Ellen's balance have grown to, including interest?

A) $7,516.68
B) $7,516.88
C) $7,261.33
D) $6,836.78
E) None of these

Question 59

John James lent Mel Karras $8,000 to open a pottery shop. Mel will repay John at the end of five years with interest, compounded quarterly, at 8%. How much will John receive at the end of five years?

Question 60

Gracie Shay wants to buy a new Hummer in five years. Gracie estimates the cost of the Hummer will be $28,000. If she invests $12,000 now at a rate of 6% compounded semiannually, she:

A) Will have enough money
B) Will have exactly $16,000
C) Will have $18,000
D) Will have $16,126.80
E) None of these

Question 61

Al Safe deposited $15,000 at Q Bank at an interest rate of 16%, compounded quarterly. What was the effective rate (APY)?

Question 62

Mel Ross thinks he would like to buy a used car in five years for $8,000. He wants to put the money aside now so that in five years the $8,000 will be available. His bank offers him 12% interest, compounded semiannually. Could you calculate what Mel must invest today?

Question 63

Marcia Gadzera wants to retire in San Diego when she is 65 years old. Marcia is now 50 and believes she will need $90,000 to retire comfortably. To date, she has set aside no retirement money. If she gets interest of 10% compounded semiannually, how much must she invest today to meet her goal of $90,000?

Question 64

Abe Frill wants to attend AVP Tech. He will need to have $15,000 seven years from today. How much should Abe put in the bank today (12% quarterly) to reach his goal in the future?

Question 65

Mark Larken promised his grandson Ralph that he would give him $3,000 six years from today for graduating from high school. If money is worth 10% compounded semiannually, what is the present value of this money?

Question 66

Al Derover wants to buy a used jeep in five years. He estimates the cost will be $12,000. If he invests $8,500 now at a rate of 10% compounded semiannually, will he have enough money to buy the jeep at the end of five years? Show your work.