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compounded interest and simple interest based question

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A client comes to you for investment advice on his $500,000 winnings from the lottery. He has been offered the following options by three different financial institutions and requests assistance to help understand which option would be the best for his investment.

Option 1: 6% compounded interest quarterly for 5 years.
Option 2: 8% compounded interest annually for 5 years.
Option 3: 14.5% simple interest for 10 years.

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The solution provides detailed explanation how to use compounded interest and simple interest to find out the total interest.

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Sample Finance Quiz Questions (simple/compound interest, investments compounded annually, and more...)

6. A financially wise individual would prefer a loan based on __________ interest and an
investment earning __________ interest.
a. compound; compound
b. compound; simple
c. simple; compound
d. simple; simple
e. complex; compound

8. Over time, the future value of $1,000 invested today at 6 percent, compounded
annually, will increase by a(n):
a. constant annual amount given the interest on interest effect.
b. constant annual amount given that interest is compounded annually.
c. decreasing annual amount due to the compounding effect.
d. increasing annual amount given the compound interest effect.
e. increasing annual amount due to the effects of the simple interest rate.

9. Sancho deposits $500 in a bank account today which pays 4 percent interest,
compounded annually. The amount of interest Sancho earns in year 4 will be:
I. equal to the interest earned in year 3.
II. greater than the interest earned in year 3.
III. less than the interest earned in year 3.
IV. greater than the interest earned in year 5.
V. less than the interest earned in year 5.
a. I only
b. II and IV only
c. II and V only
d. III and IV only
e. III and V only

11. Tom, Dick, and Harry are triplets. They all decide to borrow $1,000 today to go on
vacation. They will repay their loans, plus all the accrued interest, in one lump sum
exactly 1 year from today. Tom borrows his money at 6 percent simple interest. Dick's loan is based on 6 percent interest compounded monthly. Harry is charged 6 percent compounded annually. Given this information, which one of the following statements is correct?
a. Tom will pay the most interest.
b. Harry will pay the most interest.
c. Harry will pay more interest than Dick, but less interest than Tom.
d. Dick will pay more interest than either Harry or Tom.
e. Tom will pay more interest than Harry, but less than Dick.

13. The relationship between the present value and the interest rate is best described as:
a. direct.
b. inverse.
c. unrelated.
d. uncorrelated.
e. vertical.

14. The present value of $10,000 to be received in 10 years will __________ if the
discount rate is increased.
a. remain constant
b. decrease
c. increase
d. either remain constant or increase
e. either remain constant or decrease

15. Given a 6 percent rate of return and a time period of 5 years, the future value will
__________ if the present value is increased.
a. remain constant
b. decrease
c. increase
d. either remain constant or increase
e. either remain constant or decrease

18. You invest $10,000 today into a retirement account. You expect to earn 11 percent, compounded monthly, on your money for the next 25 years. After that, you want to be more conservative, so only expect to earn 7 percent, compounded semi-annually. How much money will you have in your account when you retire 40 years from now, assuming that this is the only deposit you make into the account?

19. Your grandfather spent $2,000 to buy 200 shares of stock in a new company 60 years ago. The stock has appreciated 9 percent per year on average. What is the current value of these 200 shares?

21. Today, you are investing $25,000 at 6 percent, compounded monthly, for 10 years. How much additional income could you earn if you could have invested this amount at 7 percent, compounded monthly?

22. Eight years from now, you will be inheriting $8,400. What is this inheritance worth to you today if you can earn 6 percent interest compounded annually?

23. You want to have $100,000 for your daughter's education 18 years from now. If you can earn 8 percent, compounded quarterly, on your savings, how much do you need to deposit today to reach your goal?

24. How long will it take to quadruple your savings at 9 percent compounded quarterly?

25. Your firm has been told that it needs $74,300 today to fund a $120,000 expense 6 years from now. What rate of interest was used in the computation?

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