Deck 19: Compound Interest and Present Value

Question 1

In the compound interest formula, i stands for periodic interest rate.

Answer 1

True

Question 2

The nominal rate is really the true rate.

Answer 2

False

Question 3

Annual means compounded once a year.

Answer 3

True

Question 4

Compound value = $ amount divided by
.

Question 5

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

Question 6

Interest = principal * rate divided by the time.

Question 7

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

Question 8

The factor for compounding $4,000 at 9% compounded annually for one year is 1.0900.

Question 9

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

Question 10

Compounding always requires the use of tables.

Question 11

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

Question 12

The interest on $3,000 at 8% compounded semiannually for six years is $1,803.10.

Question 13

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

Question 14

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

Question 15

Compounding results in earning higher interest than simple interest.

Question 16

The I/Y key on a financial calculator is used to input the periodic interest rate.

Question 17

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

Question 18

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

Question 19

Compounding always reduces the principal.

Question 20

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

Question 21

Multiplying by 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 22

The interest on $6,000 at 6% compounded semiannually for eight years is

A) $3,628.24
B) $3,682.02
C) $362.82
D) $13,628.20
E) None of these

Question 23

The present value of $1 means that for 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 24

The present value is also less than the future value.

Question 25

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 26

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

Question 27

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 28

$6,000 for six years at 8½% compounded daily will grow to:

A) $8,991.02
B) $8,950.10
C) $9,991.35
D) $9,990.02
E) None of these

Question 29

Using daily compounding, $700 would grow to $790 at the end of three years at 8% interest.

Question 30

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) $106.29
D) $106.03
E) None of these

Question 31

The rate used in 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 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

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 35

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

Question 36

The present value of $12,000 for six years compounded at 6% semiannually is:

A) $12,814.08
B) $8,461.08
C) $8,416.56
D) $8,614.80
E) None of these

Question 37

$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 38

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

Question 39

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

Question 40

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 41

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 (to the nearest dollar)

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

Question 42

Moxie Fox deposited $30,000 in a savings account at 6% interest compounded semiannually. At the beginning of year 4, Moxie deposits an additional $60,000 at 6% interest compounded semiannually. At the end of six years, what is the balance in Moxie's account?

Question 43

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. Round to nearest dollar.

A) $18,950
B) $33,226
C) $18,589
D) $33,622
E) None of these

Question 44

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

A) $29,760.30
B) $30,653.86
C) $30,456.07
D) $29,670.03
E) None of these

Question 45

Jim Ryan deposited $8,000 at National Bank at 6% interest compounded quarterly. What was the effective rate (APY)? (Round to the nearest hundredth percent.)

Question 46

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 47

Don Williams wants to buy a boat five years from today. He will need $40,000. Don wants you to calculate how much he needs today to put in the bank (10% compounded semiannually) to reach his goal in the future.

Question 48

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

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

Question 49

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 50

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

A) $73,604.00
B) $53,604.00
C) $80,406.00
D) $98,636.18
E) None of these

Question 51

Juanita Finn deposits $12,000 into Valley Bank, which pays interest of 8% compounded annually for four years. How much will Juanita have in her account?

Question 52

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?

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

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

Question 54

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 not have enough money
E) None of these

Question 55

Jarad Rodriguez deposits $10,000 at 10% compounded semiannually. At the start of year 6, Jarad deposits an additional $5,000 that is compounded at the same rate. At the end of 10 years, what is the balance in Jarad's account?

Question 56

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

A) $14,983.85
B) $16,857
C) $16,587
D) $14,484
E) None of these

Question 57

Jim Smith believes that in 30 years he will need $80,000 to buy a retirement cottage. Assuming he gets an interest rate of 9% compounded annually, how much will he have to invest today to reach his retirement goal?

Question 58

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. Al must invest today:

A) $6,709.95
B) $6,942.60
C) $6,701.60
D) $125,335.10
E) None of these

Question 59

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. 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 60

John Riviera deposits $14,000 in National Bank at 8% compounded quarterly. What is the effective rate (APY) of interest?

Question 61

Check your answer by use of the financial calculator.

Question 62

Paul Lospennato wants to buy a house. Five years from now, he will need $90,000. Paul wants you to calculate how much he needs today to put in the bank (10% compounded semiannually) to reach his goal in the future.

Question 63

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 64

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.