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Compound Interest, Future Value, and Present Value

Compound Interest, Future Value, and Present Value

1. Explain which of the two options below results in a lower balance after 6 months on a debt of $2500.

Annual simple interest of 12% applied at the end of the 6 months.
A monthly interest rate of 1% applied at the end of each month and before the start of the next month.
Discuss why the two methods result in different results.

In what circumstances might you select one option over another?

2. An increase in value of any collection is not guaranteed for a variety of reasons. If you are a collector, please use your own collection to answer the following questions. If you are not a collector, then use Elvis memorabilia for your answers.

What are some of the factors that could cause the value of your collection to drop in the future?
What questions should an investor ask before investing in anything?
If no new memorabilia can be created with an autograph, how does the idea of scarcity increase the value of an item?

Solution Preview

Answer:

Annual simple interest of 12% applied at the end of the 6 months.
Balance=(2500 * 12 * 6 ) /(12* 100) = 150

A monthly interest rate of 1% applied at the end of each month and before the start of the next month.
Balance=2500*(1.01)^6=2653.80

Discuss why ...

Solution Summary

Compound interest, future values and present values are provided. The circumstances which might be selected to option over another one is given.

$2.19