Simple versus compound interest nancial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed terest rates are used throughout this question. dison deposited $1,000 in a savings account at her bank. Her account will earn an annual simple interest rate of 5.8%. If she makes no additional posits or withdrawals, how much money will she have in her account in 9 years? O $158.00 O $1,661.01 O $1,061.36 O $1,522.00
Simple versus compound interest nancial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed terest rates are used throughout this question. dison deposited $1,000 in a savings account at her bank. Her account will earn an annual simple interest rate of 5.8%. If she makes no additional posits or withdrawals, how much money will she have in her account in 9 years? O $158.00 O $1,661.01 O $1,061.36 O $1,522.00
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### 2. Simple versus Compound Interest
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.
Addison deposited $1,000 in a savings account at her bank. Her account will earn an annual **simple interest** rate of 5.8%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 9 years?
- $158.00
- $1,661.01
- $1,061.36
- $1,522.00
Now, assume that Addison’s savings institution modifies the terms of her account and agrees to pay 5.8% in **compound interest** on her $1,000 balance. All other things being equal, how much money will Addison have in her account in 9 years?
- $1,522.00
- $1,058.00
- $96.34
- $1,661.01
Suppose Addison had deposited another $1,000 into a savings account at a second bank at the same time. The second bank also pays a nominal (or stated) interest rate of 5.8% but with quarterly compounding. Keeping everything else constant, how much money will Addison have in her account at this bank in 9 years?
- $103.03
- $1,059.27
- $1,679.09
- $158.00
Transcribed Image Text:This educational content explains the fundamental terminology and concepts related to the time value of money, an essential aspect of financial management. Below, each term is matched with its corresponding description:
1. **Discounting** (J) - A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.
2. **Time value of money** (H) - A concept that maintains the owner of a cash flow will value it differently, depending on when it occurs.
3. **Amortized loan** (F) - A loan in which the payments include interest as well as loan principal.
4. **Ordinary annuity** (B) - A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years.
5. **Annual percentage rate (APR)** (G) - A value that represents the interest paid by borrowers or earned by lenders, expressed as a percentage of the amount borrowed or invested over a 12-month period.
6. **Annuity due** (C) - A cash flow stream that is created by a lease that requires the payment to be paid on the first of each month and a lease period of three years.
7. **Perpetuity** (A) - A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely.
8. **Future value** (I) - One of the four major time value of money terms; the amount to which an individual cash flow or series of cash payments or receipts will grow over a period of time when earning interest at a given rate of interest.
9. **Amortization schedule** (E) - A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.
10. **Opportunity cost of funds** (D) - A rate that represents the return on an investor's best available alternative investment of equal risk.
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