1. Simple versus compound interest Aa Aa Financial contracts involving investmen

Question

1. Simple versus compound interest Aa Aa Financial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed interest rates are used throughout this question Abigail plans to loan $900 to her friend, who will pay a simple interest rate of 9% every year for the loan. If no payments are made and no further borrowing occurs between them for seven years, then how much money will Abigail's friend owe her? $1,645.24 $181.00 $1,467.00 O $988.29 Now, assume that Abigail's friend volunteers to pay compoundO $981.00 interest instead of simple interest for her loan. If interest is accrued at 9% compounded annually, all other things being equal, how much money will Abigail's friend owe her in seven years? $1,645.24 $1,467.00 $148.07 Abigail has another investment option in the market that pays 9% nominal interest, but it's ompounded quarterly Keeping everything else constant, how much money will Abigail have in seven years if she invests $900 in this fund? $164.62 $983.77 O $1,678.09 O $181.00

Explanation / Answer

Part 1:

SI = Principal $900 * Rate 9% * Time 7years i.e. $567

Amount due in 7 years = Principal $900 + Simple Interest $567 = $1467

Part B:

Amount due in 7 years = Principle $900 (1+Interest Rate 9%) Number of years 7

Amount due in 7 years = $1645.24

Part C:

Amount due in 7 years compounded quarterly = Principal $900 * (1+Interest rate 9% / Quarters in a year 4) Number of years 7 * Quarters in a year 4

Amount due in 7 years compounded quarterly = $1678.09

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