Exam 12: Compound Interest and Present Value

Molly Scupper wants to attend Clarke University. She will need $90,000 eight years from today. Assume Molly's bank pays 6% interest compounded quarterly. What must Molly deposit today to have $90,000 in eight years? Verify your answer.

Interest = principal × rate divided by the time.

The number of periods in compounding is found by multiplying the number of years times the number of times compounded per year.

Compounding interest daily is seldom used in comparison to compounding once a year.

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:

Al Derover wants to buy a used jeep in five years. He estimates the cost will be $12,000. If he invests $8,500 now at a rate of 10% compounded semiannually, will he have enough money to buy the jeep at the end of five years? Show your work.

Al Safe deposited $15,000 at Q Bank at an interest rate of 16%, compounded quarterly. What was the effective rate (APY)?

Pete Sist wants to buy a new Chevrolet in five years. He estimates the car will cost $24,000. Assuming Pete invests $15,000 now at 10% interest compounded semiannually, will he have enough money to buy the car at the end of five years? He will have $24,433.50; yes

Trisha Long wants to buy a boat in five years. She estimates the boat will cost $15,000 at that time. What must Trisha deposit today in an account earning 5% annually to have enough to buy the boat in five years?

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

Using the interest for daily compounding (in your handbook), $700 would grow to $790 at the end of three years at 8% interest.

Compounding looks into the present when we know what we have in the future.

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?

In tables for calculating compound interest, the number of periods is equal to:

Gracie Shay wants to buy a new Hummer in five years. Gracie estimates the cost of the Hummer will be $28,000. If she invests $12,000 now at a rate of 6% compounded semiannually, she:

The effective rate (APY) can be calculated by the interest for one year divided by the principal.

Anne Katz, the owner of Katz Sport Shop, lends $8,000 to Shelley Slater to help her open an art shop. Shelley plans to repay Anne at the end of eight years with interest compounded semiannually at 8%. At the end of eight years, Anne will receive (use the tables in the handbook):

Present value does not:

A table factor of .7513 from a present value table means that if $.75 is invested at a certain rate of interest for a certain number of periods, it would be worth $1 in the past.

The nominal rate is really the true rate.