FIN 300 Chapter 5

1. Interest on interest increase every year.

True

False

2. Simple interest earned each year on an investment remains constant.

True

False

3. The process of converting the initial amount into future value is called:

Discounting

Compounding

Both A and B

Future conversion

4. The more frequently interest payments are compounded, the larger the future value of $1 for a given time period.

True

False

5. The growth in the future value over time is linear.

True

False

The growth in the future value over time is not linear, but exponential.

Explanation

The growth in the future value over time is not linear, but exponential.

6. What is the future value of $5,000 invested for 10 years at 15 percent interest. Also, what is the simple interest and interest on interest for the 10 year period.

20, 227.29 ; $7,500 ; $12,727.79

$20, 227.29 ; $7,500 ; $ 7,727.79

$20,227.79 ; $12,500 ; $ 7,727.79

Cannot be determined

7. Compounded interest are composed of:

Interest on Interest

Simple interest

Interest on Interest and Simple interest

Time value of money

8. Say you leave $100 invested in the bank savings account at 10 percent interest for five years. What is the simple interest and the interest on interest for the five year period?

$50 ; $61.05

$61.05 ; $61.05

$50 ; $11.05

$161.05

Fin 300 Chapter 5