Exam 12: Compound Interest and Present Value

Burton Bush wants to retire in Arizona when he is 80 years of age. Burton, who is now 55, believes he will need $400,000 to retire comfortably. To date, he has set aside no retirement money. If he gets an interest rate of 6% compounded annually, he will have to invest today (use the tables in the handbook):

Lisa Richter deposited $5,000 at 4% compounded semiannually for three years. At the beginning of the fourth year, Lisa deposited $2,500. What would her balance be at the end of five years assuming she is still earning 4% compounded semiannually?

Compounding results in earning higher interest than simple interest.

The number of periods for a table lookup on $5,000 at 12% compounded semiannually for 10 years is 10 periods.

Using the table in your handbook, $6,000 for six years at 8½% compounded daily will grow to:

The table for the compound value of $1 has only table factors over $1.00.

Using the table in handbook, the value of $60 deposited in a bank for six years at a rate of 10% compounded annually is:

A compound table factor of 1.2950 means that $1 at a certain rate of interest for a certain period of time will increase in value to approximately $1.30.

Present value starts with the future and tries to calculate its worth in the present.

Mia Kaminsky wants to attend Riverside Community College. She will need to have $25,000 six years from today. Mia is wondering what she will have to put in the bank today so that she will have $25,000 six years from now. Her bank pays 5% compounded semiannually. Using the tables in the handbook, the amount Mia will have to deposit is:

Effective rates can be seen in the compounding table for one dollar.

Interest on $2,630 at 3% compounded semiannually for five years is:

Effective rate (APY) is:

Sam Monte deposits $21,500 into Legal Bank, which pays 6% interest that is compounded semiannually. Using the table in the handbook, what will Sam have in his account at the end of six years?

Using the table in the handbook, the present value of $12,000 for six years compounded at 6% semiannually is:

The nominal rate is really the true rate.

Jim Moore opens a new savings account. He deposits $12,000 at 12% compounded semiannually. At the start of the fourth year, Jim deposits an additional $50,000 that is also compounded semiannually at 12%. At the end of six years, the balance in Jim Moore's account is (use the tables in the handbook):

$100,000 for 20 years compounded at 4% annually results in a rate per period of:

Compounding always reduces the principal.

Earl Miller deposited $25,000 at Y Bank at an interest rate of 12% compounded quarterly. (Use the tables in the handbook.) The effective rate (APY) is: