Question

Mahadev and Jennifer are sitting together, with their notebooks and textbooks open, at a coffee shop. They've been reviewing the latest lecture from Dr. Boudreaux's personal finance class by asking questions of one another. Today's topic addressed the calculation of future values for both simple and compound interest-earning accounts. Mahadev: So, why is it important to be able to calculate the future value of some amount invested? Jennifer: First, remember that the amount invested is usually called and the amount earned during the investment period is called . It is important to be able to calculate a future value so that you can know in advance what a given amount of principal will be worth after earning a specified for a known Mahadev: OK, I understand that and I know the amount invested today can be called the value of the investment, whereas the amount realized after the passage of "I period of time is called its value. But what causes the present and future values to be different values? Jennifer: Two things cause the present and future values to be different amounts. First, the earned during the investment period causes the future value to be greater than, equal to, or less than the present value. Second, the method used to calculate the interest earned that is, whether the account pays interest--determines the amount by which the future value differs from the present value. Mahadev: That makes sense and I remember Dr. Boudreaux says that the difference between simple and compound interest is that in the case of interest, interest is earned solely on the invested principal, but in the case interest, interest is earned on not only the NET

Answer 1

1) Solution: Principal; interest; interest rate; period of time

Explanation: Principal is the invested amount; interest is earned on principal amount; interest rate; period of time is the investment period.

2) Solution: present; future

Explanation: Present value is the amount of principal invested today and future value is amount realized after the invested period of time

3) Solution: interest rate; simple or compound

Explanation: The present and future values tends to be different due to the interest rate which can be simple or compound

4) Solution: simple; compound

Explanation: Simple is earned on the invested principal solely while compound interest is earned on the principal plus the earned interest previously