AppC Self-Study Questions

1. How does simple interest differ from compound interest? LO

page C-1

C-1)

a. Simple interest includes interest earned on the initial investment plus interest earned on previous interest.

b. Simple interest includes interest earned on the initial investment only.

c. Simple interest is for a shorter time interval.

d. Simple interest is for a longer time interval.

b. Simple interest includes interest earned on the initial investment only.

2. What is the future value of $100 invested in an account for eight years that earns 10% annual interest, compounded semiannually (rounded to the nearest whole dollar)? ( LO C-2)

a. $214.

b. $216.

c. $218.

d. $220.

c. $218.

3. Present value represents LO C-3)

a. The value today of receiving money in the future.

b. The amount that an investment today will grow to be in the future.

c. The difference between the initial investment and the growth of that investment over time.

d. A series of equal payments.

a. The value today of receiving money in the future.

4. Cooper wants to save for college. Assuming he puts $5,000 into an account at the end of each year for five years and earns 12% compounded annually, how much will he have saved by the end of the fifth year (rounded to the nearest whole dollar)?

LO C-4)

a. $25,000.

b. $31,764.

c. $18,024.

d. $14,096.

b. $31,764.

5. A company agrees to pay $100,000 each year for five years for an exclusive franchise agreement. Assuming a discount rate of 8%, what is the cost today of the agreement (rounded to the nearest whole dollar)? ( LO C-5)

a. $500,000.

b. $586,660.

c. $399,271.

d. $146,933.

c. $399,271.