Exercises 1

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Please answer the following questions.

Questions and Answers

1.

You deposit $100 at 3% interest rate per year. What is the value after five years?
- A.
  
  109.73
- B.
  
  115.93
- C.
  
  119.36
- D.
  
  125.25
Correct Answer
B. 115.93

Explanation
FV = PV * (growth factor^periods)
FV = $100 * 1.03^5 = $115.93

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2.

You deposit $100 at 2% interest for the first year, with the interest increasing each year by one percentage point. What is the value after three years?
- A.
  
  102.36
- B.
  
  115.32
- C.
  
  105.32
- D.
  
  109.26
Correct Answer
D. 109.26

Explanation
FV = PV * (growth factor^periods)
FV1 = 100 * 1.02^1 = 102
FV2 = 102 * 1.03^1 = 105.06
FV3 = 105.06 * 1.04^1 = 109.26

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3.

You want to save up money to buy a car for $17,000 in three years. You plan to save $5,000 per year. You expect an annual interest rate of 6%. Will you be able to finance the car purchase?
- A.
  
  Yes
- B.
  
  No
Correct Answer
B. No

Explanation
FV = annuity payment * ((growth factor^periods -1) / interest per period) * growth factor
FV = $5,000 * ((1.06^3 - 1) / 0.06) * 1.06 = 16873,08

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4.

You want to save up money to buy a machine for $15,000 in three years. You plan to save $400 per month. You expect an annual interest rate of 6%. Will you be able to finance the car purchase?
- A.
  
  Yes
- B.
  
  No
Correct Answer
A. Yes

Explanation
interest per period: 6%/12 = 0.5% = 0.005
number of periods: 3 * 12 = 36
FV = annuity payment * ((growth factor^periods -1) / interest per period) * growth factor
FV = $400 * ((1.005^36 - 1) / 0.005) * 1.005 = $15813.11

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5.

You open an account that earn 7% annually compounded interest. Your goal is to have $3,000 (future value) in the account at the end of four years. How much must you deposit in the account today? Hint: Solve for the present value.
- A.
  
  2288.69
- B.
  
  2453.56
- C.
  
  1949.34
- D.
  
  2635.45
Correct Answer
A. 2288.69

Explanation
PV = FV / (growth factor^periods)
PV = $3,000 / 1.07^4 = $2288.69

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Current Version
Apr 19, 2014

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Apr 19, 2014

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Exercises 1

You deposit $100 at 3% interest rate per year. What is the value after five years?

You deposit $100 at 2% interest for the first year, with the interest increasing each year by one percentage point. What is the value after three years?

You want to save up money to buy a car for $17,000 in three years. You plan to save $5,000 per year. You expect an annual interest rate of 6%. Will you be able to finance the car purchase?

You want to save up money to buy a machine for $15,000 in three years. You plan to save $400 per month. You expect an annual interest rate of 6%. Will you be able to finance the car purchase?

You open an account that earn 7% annually compounded interest. Your goal is to have $3,000 (future value) in the account at the end of four years. How much must you deposit in the account today? Hint: Solve for the present value.