Question

1. Assume that it takes 11.5 years for $1,000 to accumulate to $3,000 if you earn 10% per year. What will happen to the length of time needed for $1,000 to accumulate to $3,000 if the interest rate increases?

A. Stay the same?

B. Impossible to determine

C. Increase

D. Decrease

2. Assume that it takes an investment of $3,507 today to accumulate to $5,000 in 3 years when the interest rate is 12% per year compounded quarterly. How much would need to be invested today to accumulate $5,000 in 3 years when the interest rate is compounded yearly?

A. Less than $3,507

B. $3,507

C. Impossible to determine

D. More than $3,507

3. Consider the financing of a $15,000 car over 4 years with monthly payments based on an APR of 6% compounded monthly.

A) What will happen to the payment if the car is financed over 5 years with monthly payments instead of 4?

A. Decrease

B. Impossible to determine

C. Stay the same

D. Increase

B) What will happen to the payment if the APR is 12% compounded monthly instead of 6%?

A. Stay the same

B. Increase

C. Decrease

D. Impossible to determine

Answer 1

Q1.
Answer is B. Impossible to determine
Q2.
Answer is D. More than $ 3507.
Explanation:
When the frequency of compounding per period decreases and the rate of interest is constant, then the effective rate of interest decreases.
Thus, need to make more investment to arrive at the same amount at the end of period
Q3-a
Answer is D. Decrease
Explanation: As the tenure of repayment increases with the same rate of interest and same loan amount.
Then there will be reduction in monthly payment to be made for its repayments over the tenure.
Q3-b:
Answer is B. Increase
Explanation: With the same tenure and same loan amount, but the rate of interest increases with same frequency of compounding, then the monthly payment to be made over the period of loan increases.