1-You buy a six-year, 8 percent savings certificate for $1,000. If interest is c
ID: 2633207 • Letter: 1
Question
1-You buy a six-year, 8 percent savings certificate for $1,000. If interest is compounded annually, what will its value be at maturity?
A)$1,467.43 B)$1,586.87 C)$1,601.03 D)$1,696.57 E)$1,766.33
2-Assume you win the lottery and have a choice to receive your winnings in one of two ways. Option 1 is payments of $50,000 per year for each of the next five years. Option 2 is a single payment of $200,000 immediately. Which of the following statements is most correct?
A)Option 1 is preferable to Option 2. B)Option 2 is preferable to Option 1. C)Option 1 and Option 2 are equivalent.
D)The value of Option 1 is greater than the value of Option 2 because the total cash flow is greater. E)There is not enough information to answer this question.
3-You buy a six-year, 8 percent savings certificate for $1,000. If interest is compounded semiannually, what will its value be at maturity? A)$1,467.43 B)$1,586.87 C)$1,601.03 D)$1,696.57 E)$1,766.33
4-Triangle Pediatrics is faced with multiple investment alternatives that pay interest as indicated in answers (a) through (e). If we assume Triangle Pediatrics has $100 to invest today, which alternative will give it the most money at the end of one year? A)10 percent interest, compounded annually B) 9.9 percent interest, compounded semiannually C) 9.9 percent interest, compounded monthly D) 9.5 percent interest, compounded quarterly E) 9 percent interest, compounded daily
5-An investment opportunity promises a stated interest rate of 6 percent with semiannual compounding. Which of the following statements is most correct? A)The periodic rate is greater than 3 percent. B)The periodic rate is less than 3 percent. C)The effective annual rate is less than 6 percent. D)The effective annual rate is greater than 6 percent. E)The effective annual rate is 6 percent.
Explanation / Answer
1. B)$1,586.87
FV= 10000x1.08^6= $1586.87
2. E)There is not enough information to answer this question.
We have to know the interest rate in order to find which option is better.
3.C)$1,601.03
value= 1000x1.04^12= $1,601.03
4. C) 9.9 percent interest, compounded monthly
(a)FV= 100x1.1= $110
(b)FV= 100x1.0495^2=110.145
(c)FV= 100x1.00825^12= 110.36
(d)FV= 100x1.02375^4=109.84
(e)FV= 100x1.00025^365= $109.42
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