Question

Sun Lee has $500 today. Which one of the following statements is correct if she invests this money at a positive rate of interest for five years? O The higher the interest rate, the longer she has to wait for her money to grow to $1,000 in value. O o O O The higher the interest rate she earns, the more money she will have in the future. If Sun Lee can earn 7%, she will have to wait about six years to have $1,000 total. At 10% interest Sun Lee should expect to have $1,000 in her account at the end of the five years. At the end of the five years Sun Lee will have less money if she invests at 7% rather than at 5%.

Answer 1

If she invests $500 today, the higher the interest rate, the more money she will have in the future,

So, the correct option is option B.

So, the option 1 is incorrect. As higher interest rates means more money in the future rather than less. So, she has to wait less and not wait longer.

If the I/Y = 7%

PV = ($500)

FV = $1000

N= 10 Years, it will take her 10 and not 6 years. So, option 3 is incorrect.

Similarly at 10% interest it would take her 7 years and not 5 years to get $1000 in the account. So, option 4 is also incorrect.

Again option 5 is incorrect, at a higher rate of interest she will have more and not less money.

For example: at the end of 5 years, with a higher rate of interest she has more money.

FV = $500 * 1.07^5

= $701.27

At 5% interest,

= $500* 1.05^5

=$638.14