Basic concepts in Finance

1.) Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

1) If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
2) Neal will earn more interest on interest than Sue.
3) Sue will have less money when she retires than Neal.
4) Sue will have more money than Neal as long as they retire at the same time.
5) Neal will earn more compound interest than Sue.

2.) Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

1) Andy will earn more interest in year three than Barb will.
2) Barb will earn interest on interest.
3) After five years, Andy and Barb will both have earned the same amount of interest.
4) Barb will earn more interest the first year than Andy will.
5) Andy will earn compound interest.

3,) Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

1) Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.
2) Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
3) The present values of Luis and Soo Lee's monies are equal.
4) In today's dollars, Luis' money is worth more than Soo Lee's.
5) In future dollars, Soo Lee's money is worth more than Luis' money.

4.) Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:

1) interest on interest.
2) simple interest.
3) present value interest.
4) free interest.
5) bonus income.

5.) Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

1) accumulation
2) discounting
3) simplifying
4) aggregation
5) compounding