Question

me that fixed Financial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume Interest rates are used throughout this question. Emma deposited $500 in a savings account at her bank. Her account will earn an annual simple interest rate of 9%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 11 years? $995.00 $145.00 $1,290.21 $549.05 Now, assume that Emma's savings institution modifies the terms of her account and agrees to pay 9% in compound interest on her $500 balance. All other things being equal, how much money will Emma have in her account in 11 years? $116.12 $545.00 $1,290.21 $995.00 Suppose Emma had deposited another $500 into a savings account at a second bank at the same time. The second bank also pays a nominal (or stated) interest rate of 9% but with quarterly compounding. Keeping everything else constant, how much money will Emma have in her account at this bank in 11 years? $130.56 od Floor $145.00 $1,330.93 $546,54

Answer 1

Answer a.

Future Value = Present Value + Present Value * Interest Rate * Time Period
Future Value = $500 + $500 * 0.09 * 11
Future Value = $995.00

Answer b.

Future Value = Present Value * (1 + Interest Rate)^Time Period
Future Value = $500 * (1 + 0.09)^11
Future Value = $1,290.21

Answer c.

Annual Interest Rate = 9.00%
Quarterly Interest Rate = 2.25%

Period = 11 years or 44 quarters

Future Value = Present Value * (1 + Interest Rate)^Time Period
Future Value = $500 * (1 + 0.0225)^44
Future Value = $1,330.93

Answer d.

The process for converting present values into future values is called compounding. This process requires knowledge of the values of the following time-value-of-money variable:
The duration of the investment (N)
The interest rate (I) that could be earned by invested funds
The present value (PV) of the amount invested

Answer e.

Line A: 16%
Line B: 8%
Line C: 0%

Answer f.

Investments and loans base their interest calculations on one of two possible methods: the simple interest and the compound interest methods.

Answer g.

Compound Interest: FV = PV * (1 + I)^N
Simple Interest: FV = PV + (PV * I * N)

Answer h.

Investment A:

Future Value = $30,000 + $30,000 * 8% * 6
Future Value = $44,400

Investment B:

Future Value = $30,000 * 1.03^6
Future Value = $35,821.57

Investment C:

Future Value = $30,000 * 1.05^6
Future Value = $40,202.87

So, you should make Investment A as its future value is highest.