Question 1

You have just landed your first job. Part of the offer includes a $4,000 new employee bonus which is intended to cover your relocation costs. You have determined that you can move yourself for $1,000. Thus, you have decided to open an Individual Retirement Account with the remaining $3,000. How much more will this investment be worth 35 years from now if you can earn an average rate of return of 9.5% rather than 9%?

Accepted Answer

The answer of You have just landed your first job....

Question 2

You have just been awarded a $200,000 insurance settlement. The insurance company has offered to invest this amount at a guaranteed interest rate of 4.5% for ten years. You think you can invest this money yourself and earn an average return of 8%. If you are able to do that, how much more will your settlement be worth ten years from now than if you had left the funds with the insurance company?

Accepted Answer

The answer of You have just been awarded a $200,000...

Question 3

You are supposed to receive $2,000 five years from now. At an interest rate of 6%, what is that $2,000 worth today?

Accepted Answer

The answer of You are supposed to receive $2,000 five...

Question 4

You are scheduled to receive $18,000 in five years. When you receive it, you will invest it for five more years at 8.6% per year. How much will you have at the end of this time? What would be an equivalent Present Value?

Accepted Answer

The answer of You are scheduled to receive $18,000 in...

Question 5

Dale invests $500 in an account that pays 6% simple interest. How much more could he have earned over a thirty year period if the interest had compounded annually?

Accepted Answer

The correct answer is A because the difference in the amount earned over a thirty year period between simple interest and compound interest is $1,471.75.

Question 6

A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of interest used and calculate the balance at the end of year four.

Accepted Answer

The deposit grew from $10,000 to $12,500 in 5 years, which is an increase of $2,500. To find the annual interest rate, we can use the formula for simple interest: $I = P \times r \times t$, where $I$ is the interest, $P$ is the principal amount, $r$ is the rate of interest per year, and $t$ is the time in years. Rearranging the formula to solve for $r$, we get $r = \frac{I}{P \times t}$. Substituting the given values, $r = \frac{2500}{10000 \times 5} = \frac{2500}{50000} = 0.05$, or 5% per year.To calculate the balance at the end of year four, we use the formula for the future value of a single sum: $FV = P(1 + rt)$, where $FV$ is the future value, $P$ is the principal amount, $r$ is the rate of interest per year, and $t$ is the time in years. Substituting the given values, $FV = 10000(1 + 0.05 \times 4) = 10000(1 + 0.2) = 10000 \times 1.2 = 12000$. However, since the question seems to imply compound interest due to the discrepancy in the calculation, we should consider the compound interest formula, which wasn't directly used in the explanation. Given the options and the context, the closest match to a reasonable outcome for year four under typical compound interest scenarios is option A, but the exact calculation method and the correct interpretation of the interest type (simple vs. compound) were not fully detailed in the explanation provided.

Question 7

You will be receiving $5,000 from your family as a graduation present. You have decided to save this money for your retirement. You plan to retire thirty-five years after graduating. How much additional money will you have at that time if you can earn an average of 8.5% on your investment instead of just 8%?

Accepted Answer

The future value of an investment can be calculated using the formula FV = PV * (1 + r)^n. Calculating for both 8% and 8.5% over 35 years and finding the difference gives the additional amount.

Question 8

Twenty years from now, you would like to purchase a cottage located on the shores of your favourite lake. You expect that you will have $250,000 available at that time for this purchase. You could afford a home that is currently selling for ____ if the homes increase in value by 3% annually, but if the homes increase in value by 5% annually, you can only afford a home priced at _____ today.

Accepted Answer

The answer of Twenty years from now, you would like...

Question 9

What is the future value of $7,540 invested at 6.5% interest for seven years?

Accepted Answer

The answer of What is the future value of $7,540...

Question 10

You would like to give your daughter $50,000 towards her college education 15 years from now. How much money must you set aside today for this purpose if you can earn 9% on your investments?

Accepted Answer

The answer of You would like to give your daughter...

Question 11

Wexter and Daughter invested $165,000 to help fund a company expansion project planned for 3 years from now. How much additional money will the firm have saved 3 years from now if it can earn 7% rather than 5% on this money?

Accepted Answer

The future value of the investment at 7% interest is $202,062.97, and at 5% interest, it is $190,939. The difference is $11,123.97.

Question 12

Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?

Accepted Answer

First, calculate the future value of the $6,000 investment after two years with a 10% annual interest rate, using the formula for compound interest: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value ($6,000), r is the annual interest rate (10% or 0.10), and n is the number of years (2). So, FV = $6,000 * (1 + 0.10)^2 = $6,000 * 1.21 = $7,260. This is the amount you will have in two years. Since your parents are matching this amount, the total amount available to spend on the car is $7,260 (your savings) + $7,260 (parents' contribution) = $14,520.

Question 13

You just won the lottery and want to put some money away for your child's college education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?

Accepted Answer

The answer of You just won the lottery and want...

Question 14

An account was opened with $1,000 ten years ago. Today, the account balance is $1,500. If the account paid interest compounded annually, how much interest on interest was earned?

Accepted Answer

The correct answer is A because the interest on interest is the difference between the total interest earned and the simple interest earned. The total interest earned is $500, and the simple interest earned is $413.80. Therefore, the interest on interest is $86.20.

Question 15

Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for eight years from now. How much additional money will they have eight years from now if they can earn 9% rather than 7% on this money?

Accepted Answer

The answer of Alpo, Inc. invested $500,000 to help fund...

Question 16

You wish to have $400,000 at the end of twenty-five years. In the last ten years, you contribute $1,000 semi-annually at a rate of 5.8% compounded monthly. During the middle ten years, you withdraw $750 quarterly at a rate of 4.5% compounded annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

Accepted Answer

The answer of You wish to have $400,000 at the...

Question 17

You collect model cars. One particular model increases in value at a rate of 5% per year. Today, the model is worth $29.50. How much additional money can you make if you wait ten years to sell the model rather than selling it five years from now?

Accepted Answer

The answer of You collect model cars. One particular model...

Question 18

You wish to have $200,000 at the end of twenty years. In the last five years, you withdraw $1,000 annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500 monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

Accepted Answer

The answer of You wish to have $200,000 at the...

Question 19

You just received $278,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 38 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 9.5% rather than just 9.0%?

Accepted Answer

The answer of You just received $278,000 from an insurance...

Question 20

During years 2 and 3 combined, the account earned $10 compound interest. How much was in simple interest?

Accepted Answer

The account earned $10 compound interest during years 2 and 3 combined. This means that the interest earned in year 2 was $5, and the interest earned in year 3 was $5. The simple interest earned during years 2 and 3 combined is $10.

Quiz 5: Introduction to Valuation: the Time Value of Money