Simple & Compound Interest Questions and Answers

ssignment O Points 0 of 1 Comprehensive problem You would like to have 54 000 in 13 years To accumulate this amount you plan to deposit an equal sum in the bank each year that will earn 8 percent interest compounded annually Your first payment will be made at the end of year a How much must you deposit annually to accumulate this amount b If you decide to make a large lump sum deposit today instead of the annual deposits how large should this lump sum deposit be Assume you can earn 8 percent on this deposit c At the end of five years you will receive 10 000 and deposit this in the bank toward your goal of 54 000 at the end of year 13 In addition to the lump sum deposit how much must you deposit in equal annual amounts beginning in year 1 to reach your goal Again assume you can eam 8 percent on your deposits a How much must you deposit annually to accumulate this amount Round to the nearest cent Part 1 of 4 CETES Sa hs

18 The present value of the contract is Round to the nearest cent Present value of a complex stream Don Draper has signed a contract that will pay him 50 000 at the end of each year for the next 10 years plus an additional 100 000 at the end of year 10 If 8 percent is the appropriate discount rate what is the p this contract Points 0 of 1 ETTE

Part 1 of 2 a If the retirement account will pay 27 percent annually how much money will Mr Burns need when he retires SI billion Round to three decimal places Points 0 of 1 Future value of a complex annuity Springfield mogul Montgomery Burns age 85 wants to retire at age 100 so he can steal candy from babies full time Once Mr Burns retires he wants to withdraw 0 8 billion at the beginning of each year for 7 years from a special offshom account that will pay 27 percent annually In order to fund his retirement Mr Burns will make 15 equal end of the year deposits in this same special account that will pay 27 percent annually How much money will Mr Burns need at age 100 and how large of an annual deposit must he make to fund this retirement account C Save

Present value of an uneven stream of payments You are given three investment alternatives to analyze The cash flows from these three investments are as follows Investment End of Year 1 2 A 3 000 4 000 5 000 6 000 5 6 000 Click on the icon in order to copy its contents into a spreadsheet What is the present value of each of these three investments if the appropriate discount rate is 13 percent 3 4 B 3 000 3 000 3 000 3 000 5 000 C 6 000 6 000 6 000 6 000 16 000 C a What is the present value of investment A at an annual discount rate of 13 percent Round to the nearest cent 4

Present value of a growing perpetuity As a result of winning the Gates Energy Innovation Award you are awarded a growing perpetuity The first payment will occur in a year and will be for 20 000 You will continue receiving monetary awards annually with each award increasing by 6 percent over the previous award and these monetary awards will continue forever If the appropriate interest rate is 14 percent what is the present value of this award The present value of the award is Round to the nearest cent Points U of 1 IIB

Present value of annuities and complex cash flows You are given three investment alternatives to analyze The cash flows from these three investments are as follows End of Year 1 234567 8 A 19 000 19 000 19 000 19 000 19 000 Investment B 19 000 19 000 19 000 19 000 C 24 000 72 000 a What is the present value of investment A at an annual discount rate of 24 percent Round to the nearest cent 2

Essignment Part 1 of 4 O Points 0 of 1 Comprehensive problem Over the past few years Microsoft founder Bill Gates net worth has fluctuated between 20 billion and 130 billion In early 2006 it was about 26 billion after he reduced his stake in Microsoft from 21 percent to around 14 percent by moving billions into his charitable foundation Let s see what Bill Gates can do with his money in the following problems a Manhattan s native tribe sold Manhattan Island to Peter Minuit for 24 in 1626 Now 387 years later in 2013 Bill Gates wants to buy the island from the current natives How much would Bill have to pay for Manhattan if the current natives want a 6 percent annual return on the original 24 purchase price b Bill Gates decides to pass on Manhattan and instead plans to buy the city of Seattle Washington for 70 billion in 10 years How much would Bill have to invest today at 11 percent compounded annually in order to purchase Seattle in 10 years c Now assume Bill Gates only wants to invest half his net worth today 13 billion in order to buy Seattle for 70 billion in 10 years What annual rate of return would he have to earn in order to complete his purchase in 10 years Save d Instead of buying and running large cities Bill Gates is considering quitting the rigors of the business world and retiring to work on his golf game To fund his retirement Bill would invest his 20 billion fortune in safe investments with an expected annual rate of return of 7 percent He also wants to make 40 equal annual withdrawals from this retirement fund beginning a year from today running his retirement fund to 0 at the end of 40 years How much can his annual withdrawal be in this case GZZZD a The amount Bill would have to pay for Manhattan if the current natives wanted a 6 percent annual return on the original 24 purchase price after 387 years is billion Round to two decimal places

O Points 0 of 1 Present value of a growing perpetuity What is the present value of a perpetual stream of cash flows that pays 70 000 at the end of year one and then grows at a rate of 5 per year indefinitely The rate of interest used to discount the cash flows is 12 The present value of the growing perpetuity is S Round to the nearest cent CILE

signment Part 1 of 3 HW Score 0 0 of 20 points O Points 0 of 1 a Using a spreadsheet to calculate your answer your monthly payments will be Round to the nearest cent Save Components of an annuity payment You take out a 30 year mortgage for 375 000 to buy a new house What will your monthly payments be if the interest rate on your mortgage is 6 percent Use a spreadsheet to calculate your answer Now calculate the portion of the 48th monthly payment that goes toward interest and principal Use five decimal places for the monthly interest rate in your calculations

O Points 0 of 1 Present value of a perpetuity At a discount rate of 18 00 find the present value of a perpetual payment of 4 000 per year If the discount rate were lowered to 9 00 half the initial rate what would be the value of the perpetuity Part 1 of 2 a If the discount rate were 18 00 the present value of the perpetuity is Round to the nearest cent CIXE

14 1 point The timeline represents which investment scenario 1 year F 800 Today 2 years 800 3 years 800 4 years 800 800 00 800 1 09 872 00 800 1 09 950 48 800 1 09 1036 02 Total 3658 50 N a 800 invested annually for 4 years in a fund that pays 9 interest per year compounded annually b 800 invested annually for 1 year in a fund that pays 36 per year compounded quarterly c 800 invested annually for 4 years in a fund that pays 9 interest per year compounded monthly d 800 invested annually for 4 years in a fund that pays 18 per year compounded semi annually

The amount of the 2nd payment used to reduce the debt is S Type an integer or a decimal Amortization Table Payment Number DANMASIN 2 3 9 10 11 12 Amount of Payment 472 80 472 80 472 80 472 80 472 80 472 80 472 80 472 80 472 80 472 80 472 80 472 78 Amortization Table Interest for Period 100 00 92 54 84 94 77 18 69 27 61 20 52 97 44 57 36 01 27 27 18 36 9 27 Portion to Principal Principal at End of Period 5000 00 4627 20 372 80 380 26 4246 94 387 86 3859 08 395 62 3463 46 403 53 411 60 419 83 428 23 438 79 445 53 454 44 463 51 3059 93 2648 33 2228 50 1800 27 1363 48 917 95 463 51 0 00 X

Find the cash value of the lottery jackpot given below Yearly jackpot payments begin immediately Assume the lottery can invest at the given interest rate 7 000 000 jackpot 5 interest 20 annual payments Jackpot Amount Interest Equal Annual Present Value Rate Payments in dollars 7 000 000 5 20 Round to the nearest dollar as needed Points 0 of 2 www

Find the present value of the given future amount Assume 360 days in a year 97 682 for 296 days at 5 8 simple interest What is the present value Round to the nearest dollar as needed

Balance Sheets Net Income Financial information related to the corporation of Ebony Interiors for February and March 2018 is as follows Cash Accounts receivable Supplies Accounts payable Common stock Retained earnings Cash V Accounts receivable Supplies Total assets V February 28 2018 Accounts payable 183 700 104 100 9 200 47 100 130 000 a Prepare balance sheets for Ebony Interiors as of February 28 2018 Ebony Interiors Balance Sheet February 28 2018 Assets Liabilities March 31 2018 Common stock Retained earnings Total stockholders equity Total liabilities and stockholders equity 311 800 119 600 7 600 50 900 130 000 Stockholders Equity 183 700 104 100 9 200 130 000 0 X 297 000 47 100 130 000 x 130 000 X

Statement of stockholders equity The revenues and expenses of Paradise Travel Service for the year ended May 31 20Y6 follow Fees earned Office expense Miscellaneous expense Wages expense Everett McCauley invested an additional 40 000 in the business in exchange for common stock and 10 000 of dividends were paid during the year Common stock had a balanc 60 000 and retained earnings had a balance of 300 000 as of June 1 20Y5 Prepare a statement of stockholders equity for the year ended May 31 20Y6 Paradise Travel Service Statement of Stockholders Equity For the Year Ended May 31 20Y6 Balances June 1 20Y5 Issued common stock Net income 900 000 300 000 15 000 450 000 Dividends Balances May 31 20Y6 Common Stock Retained Earnings 300 000 0 15 000 X 60 000 40 000 0 0 100 000 Total 360 000 BOOO 40 000 0 X 0 X

A person wants to invest 21 000 for 2 years and is considering two different investments The first investment a money market fund pays a guaranteed 6 2 interest compounded daily The second investment a treasury note pays 6 3 annual interest Which investment pays the most interest over the 2 year period CEEEE Select the correct choice below and if necessary fill in any answer box es to complete your choice Do not round until the final answer Then round to the nearest cent as needed OA The market fund is the better investment since the market fund produces OB Both the market fund and the treasury note produce the same interest with OC The treasury note is the better investment since the market fund produces in interest and the treasury note pays in interest in interest and the treasury note pays in interest

A retailer buys a set of luggage for 95 50 It is marked up by 48 of his cost Find the profit if it is 40 of the markup

QUESTION 4 and culate the rate of markup 25

QUESTION 8 set of luggage 101 95 50 It is marked up by 48 of his cost Find the profit if it is 40 of the markup A wallet sells for 56 It has been marked up by 28 of the cost What is the cost

A dealer buys a car for 19 500 00 His profit is 24 of the cost and his overhead is 9 of the cost What is his selling price QUESTION 6 A retailer buys a handbag for 57 80 He marks it up by 30 of his cost Calculate the selling price

You deposit 3 000 in a certificate of deposit paying 6 interest compounded monthly How much will you have in the account after 20 years Write down this question in your notebook You will need it for another question Is this a Simple Interest Compound Interest or Annuity Problem Explain in complete sentences why you chose this answer

Susan s mother set up an annuity for her She will be paid 420 at the end of each month for the next 8 years The first payment will be made 1 month from now How mu Susan s mother need to deposit in the annuity Assume the money earns 5 8 compounded monthly For the toolbar press ALT F10 PC or ALT FN F10 Mac XQ

Nancy buys a TV for 80 down and 24 monthly payments of 35 each The first payment is due next month The interest rate is 17 2 per annum compounded monthly What is the selling price of the TV2 For the toolbar press ALT F10 PE or ALT FN F10 Mac S

QUESTION 7 Nader plans to buy a used car He can afford to make payments of 280 each month for a maximum of three years The best interest rate he can find is 9 8 pel compounded monthly What is the most he can spend on a vehicle har press ALT F10 PC or ALT FN F10 Mac 10nt BEME A IX A

dy Tools Tips ips ols 7 ductory Ch 08 Assignment Risk and Rates of Return REQUIRED RATE OF RETURN Percent 16 0 120 8 0 4 0 0 0 6 7 6 0 5 1 1 Return on HC s Stock 1 0 RISK Beta CAPM Elem nts Risk free rate TRF Market risk premium RPM Happy Corp stock s beta Required rate of return on Happy Corp stock 15 Value 2 0 following graph plot SML and indicates t rn that Investors required from HC free rate 4 4 7 6 2 2 or 4 0 Marl premium 7 8 10 8 4 5 or 6 0 HC beta 0 2 0 6 or 1 0 Rate of return 6 5 6 8 9 5 7 6

REQUIRED RATE OF RETURN Percent 20 0 16 0 12 0 8 0 4 0 0 0 5 1 0 RISK Beta Return on HC s Stock 1 5 2 0

2 2 points Usha needs to repay a 3000 loan Her bank offers personal loans at 9 5 per year compounded monthly Usha can afford to make monthly payments of 100 How long will it take her to repay the loan Show your steps 40 months 30 months 20 months 35 months b C d

21 2 points Determine the monthly deposit needed to save 10000 in three years if interest is earned at 3 5 per year compounded monthly Show your steps 293 02 263 85 b 250 13 276 97

3 19 2 points What is the future value of an annuity with quarterly payments of 650 for 4 years at 5 per year compounded quarterly Show your steps a A 2616 30 9373 19 10920 00 11434 26

18 2 points Angelina has 4800 in a daily interest savings account The account pays an annual interest rate of 0 175 compounded daily Calculate the interest earned on Angelina s money in 1 5 years Show your steps 12 62 15 10 C 20 00 d 50 19

12 1 point 600 is invested quarterly for 4 years into a fund that pays 3 5 per year compounded quarterly Which are the correct values to substitute for i and n a 0 035 16 b 0 00875 16 C 600 16 d 0 00875 4

17 2 points How long will it take an investment to double in value at 4 per year simple interest Show your steps 25 years d 30 years 15 years b 20 years C

5 1 point An annuity is a series of equal payments or deposits paid at regular intervals over a fixed period of time

Eunsup has just grad to pay off his student loan No interest is charged on his loan until graduation He will repay the loan by making a payment of 10 147 26 each year for the next 3 years at an interest rate of 4 3 per year compounded annually How much did Eunsup borrow Question 11 options a b c 30 442 00 24 000 00 26 000 00 d 28 000 00 begir

b What is the profit on 343 items In the equation for P x the profit in dollars is represented by P and the number of items produced and sold is represented by x Therefore to find the profit when 343 items are sold we substitute 343 for in the equation P x 300x 3 300 Find P 343 P x 300x 3 300 Step 4 P 343 300 343 99600 343 99 600 3 300 That is if 343 items are produced and sold the total profit is 99600 99 600 c How many items must be sold to avoid losing money The manufacturer makes money if the profit is Select and loses money if the profit is Select When the manufacturer breaks even the profit is 0 So to avoid losing money the manufacturer must produce and sell the break even quantity which is the number of items that results in a profit equal to 0 We can find the break even quantity by solving the equation P x

8 Long term debt sells at par value 9 10 Balance Sheet 11 Assets 12 Cash 13 Account receivable 14 Inventories 15 Plant and equipment net 16 Total assets 17 18 19 20 21 Market value of total debt Market value of common equity Total capital 22 23 Percentage of debt 24 Percentage of common equity 25 Cash Assets Accounts receivable Inventories Total assets 120 240 360 Plant and equipment net 2 160 Yes Open spreadsheet Calculate Paulson s WACC using market value weights Round your answer to two decimal places Do not round your intermediate calculations 2 880 120 00 240 00 360 00 2 160 00 2 880 00 Liabilities And Equity Accounts payable and accruals Short term debt Long term debt Common equity Total liabilities and equity 10 63 1 100 1 707 Liabilities and Equity Accounts payable and accruals Short term debt 2 880 Long term debt Common equity Total liabilities and equity Formulas N A N A N A N A N A 10 00 63 00 1 100 00 1 707 00 2 880 00

One safe investment pays 10 per year and a more risky investment pays 18 per year A woman who has 140 700 to invest would like to have an income of 19 110 per year from her investments How much should she invest at each rate 10 18

Executive compensation packages often tie performance to bonus and incentive awards supplemental retirement packages perquisites and severance pay in order to encourage the management team to align their performance with organizational goals Which of the following compensation proposals is most likely to be in the best interest of the company s shareholders OA base salary of 500 000 plus a stock option package for 250 000 shares that mature in six months OA base salary of 500 000 plus perquisites worth 250 000 OA base salary of 500 000 plus a stock option package for 250 000 shares with 20 of shares maturing at the end of each of the next five years Vision Tech is a software company based out of San Francisco Its stockholders are mostly institutional investors and there is relatively little individual ownership If these institutions dilute their positions and sell off their stake in Vision Tech s stock to several individual investors would direct shareholder intervention be more or less likely to motivate the firm s management More likely Less likely Vision Tech s stock price is currently trading at 41 per share The consensus among analysts is that the intrinsic value of Vision Tech s stock is 33 per share Is Vision Tech more or less likely to receive a hostile takeover bid More likely Less likely

Most homeowners choose an amortization period of 25 years However it is possible to obtai shorter amortizations periods 1 a Complete this table The numbers for the first row can be obtained from Investigation 1 exercise 1a where you calculated the monthly payment on the mortgage amortized over 25 years The Interest saved is the difference between the Total interest paid during the 25 year amortization period and the Total interest paid during the shorter amortization period being calculated Amortization Total period 25 years 20 years 15 years number payments Payment Total amount Total interest paid paid Interest saved 0

Your answer is incorrect Amanda took out a 24 000 loan for 1 month and was charged simple interest The total interest she paid on the loan was 118 As a percentage what was the annual interest rate of Amanda s loan Do not round any intermediate computations If necessary refer to the list of financial formulas 0 X

What is the balance after 3 years on a CD with an initial investment of 2 200 00 and a 2 95 interest rate A 6 490 00 B 2 329 80 C 2 400 50 D 2 205 90

There are three factors that can affect the shape of the Treasury yield curve r t IPt and MRPt and five factors that can affect the shape of the corporate yield curve r t IPt MRPt DRPt and LP The yield curve reflects the aggregation of the impacts from these factors Suppose the real risk free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future Consider all factors that affect the yield curve Then identify which of the following shapes that the US Treasury yield curve can take Check all that apply Downward sloping yield curve Inverted yield curve Upward sloping yield curve Identify whether each of the following statements is true or false Statements If inflation is expected to decrease in the future and the real rate is expected to remain steady then the Treasury yield curve is downward sloping Assume MRP 0 All else equal the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm The yield curve for an AA rated corporate bond is expected to be above the US Treasury bond yield curve Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets True False

11 Karen deposits 60 000 into an account that pays simple interest at a rate of 3 per year David deposits 60 000 into an account that also pays 3 interest per year But it is compounded annually Find the interest Karen and David earn during each of the first three years Then decide who earns more Interest for each year Assume there are no withdrawals and no additional deposits Year First 13 Second Third Interest Karen earns Simple interest 0 0 s Interest David earns Interest compounded annually S 1 Who earns more interest O Karen earns more O David earns more O They earn the same amount O Karen earns more David earns more O They earn the same amount O Karen earns more David earns more O They earn the same amount

15 4 16 17 18 19 20 a Find the interest that will be owed after 183 days 21 22 23 b Assuming the print shop doesn t make any payments find the amount owed after 183 days 0 24 25 A print shop borrows 3700 from a credit union for 183 days The credit union charges simple interest at an annual rate of 8 25 for this loan Assume each 1 day is of a year Answer each part below 365 Do not round any intermediate computations and round your final answers to the nearest cent If necessary refer to the list of financial formules 26

15 16 17 18 19 20 21 a Assuming no withdrawals are made how much money is in Raina s account after 2 years b How much interest is earned on Raina s Investment after 2 years 0 22 23 24 25 Raina received a 1500 bonus She decided to invest it in a 2 year certificate of deposit CD with an annual interest rate of 1 15 compounded monthly Answer the questions below Do not round any Intermediate computations and round your final answers to the nearest cent If necessary refer to the list of financial formulas 26 27

Mary Jarvis is a single individual who is working on filing her tax return for the previous year She has assembled the following relevant information She received 77 000 in salary She received 17 500 of dividend income She received 3 700 of interest income on Home Depot bonds She received 22 500 from the sale of Disney stock that was purchased 2 years prior to the sale at a cost of 6 500 She received 9 000 from the sale of Google stock that was purchased 6 months prior to the sale at a cost of 5 300 Mary receives one exemption 4 000 and she has allowable itemized deductions of 7 500 These amounts will be deducted from her gross income to determine her taxable income Assume that her tax rates are based on Table 3 5 The data has been collected in the Microsoft Excel Online file below Open the spreadsheet and perform the required analysis to answer the questions below X Open spreadsheet a What is Mary s federal tax liability Round your answer to the nearest cent Do not round intermediate calculations b What is her marginal tax rate Round your answer to 1 decimal place c What is her average tax rate Round your answer to 2 decimal places

The number of compounding periods in one year is called compounding frequency The compounding frequency affects both the present and future values of cash flows An investor can invest money with a particular bank and earn a stated interest rate of 4 40 however interest will be compounded quarterly What are the nominal periodic and effective interest rates for this investment opportunity Interest Rates Nominal rate Periodic rate Effective annual rate Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer He particularly likes his local bank because he is being offered a nominal rate of 4 But the bank is compounding bimonthly every two months What is the effective interest rate that Rahul would pay for the loan 4 067 3 926 4 244 4 381 Another bank is also offering favorable terms so Rahul decides to take a loan of 12 000 from this bank He signs the loan contract at 5 compounded daily for 12 months Based on a 365 day year what is the total amount that Rahul owes the bank at the end of the loan s term Hint To calculate the number of days divide the number of months by 12 and multiply by 365 12 236 75 O 13 372 12 O 13 615 21

Lloyd is a divorce attorney who practices law in Florida He wants to join the American Divorce Lawyers Association ADLA a professional organization for divorce attorneys The membership dues for the ADLA are 750 per year and must be paid at the beginning of each year For instance membership dues for the first year are paid today and dues for the second year are payable one year from today However the ADLA also has an option for members to buy a lifetime membership today for 8 000 and never have to pay annual membership dues Obviously the lifetime membership isn t a good deal if you only remain a member for a couple of years but if you remain a member for 40 years it s a great deal Suppose that the appropriate annual interest rate is 7 9 What is the minimum number of years that Lloyd must remain a member of the ADLA so that the lifetime membership is cheaper on a present value basis than paying 750 in annual membership dues Note Round your answer up to the nearest year 17 years 18 years 14 years O 20 years In 1626 Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe Historians estimate that the price he paid for the island was about 24 worth of goods including beads trinkets cloth kettles and axe heads Many people find it laughable that Manhattan Island would be sold for 24 but you need to consider the future value FV of that price in more current times If the 24 purchase price could have been invested at a 4 25 annual interest rate what is its value as of 2012 386 years later 193 638 065 25 227 809 488 53 O 261 980 911 81

Suppose that the future price p 1 of a certain item is given by the following exponential function In this function p is measured in dollars and is the number of years from today p t 1800 1 019 Find the initial price of the item Does the function represent growth or decay O growth O decay By what percent does the price change each year