Question

The process for converting present values into future values is called compounding - this process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables?

• The duration of the investment (N)

• The present value (PV) of the amount invested

• The inflation rate indicating the change in average prices

• The interest rate (I) that could be earned by invested funds

Identify whether the following statements about the simple and compound interest methods are true or false.

Statement

All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.

Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest.

All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year.

Nicholai is willing to invest $35,000 for six years, and is an economically rational investor. He has identified three investment alternatives (X, Y, and Z ) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the six-year investment period, complete the following table and indicate whether Nicholai should invest in each of the investments.

Note: When calculating each investment's future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar.

Answer 1

PLEASE