Question

Compound interest is computed on the principal and any interest earned that has not been withdrawn.

Compound interest is computed on the

principal amount plus paid interest.

principal amount plus accrued interest.

principal amount plus earned interest left on deposit.

principal amount only.

_____

Which of the following is false?

Simple interest is generally applicable to long-term situations.

For the investor, compound interest is more desirable than simple interest.

Simple interest uses the initial principal to compute interest in each year.

Most business situations use compound interest.

__

In computing the amount you need to invest in order to receive $2,000 at the end of two years, the present value computation assumes your investment will be made

at the end of the first year.

at the beginning of the first year.

at the end of both years one and two.

sometime during the first year.

__

If a single future amount of $800 is to be received in 3 years and discounted at 6%, its present value is

$693.36.

$754.72.

$752.00.

$671.70.

__

A higher discount rate

produces a smaller present value.

produces a greater length of time.

produces a higher present value.

has no effect on the present value.

Answer 1

Solution 1:

Compound interest is computed on "principal amount plus earned interest left on deposit"

Hence 3rd option is correct.

Solution 2:

False statement is "Simple interest is generally applicable to long-term situations"

Hence first option is correct.

Solution 3:

In computing the amount you need to invest in order to receive $2,000 at the end of two years, the present value computation assumes your investment will be made "at the beginning of the first year."

Hence 2nd option is correct.

Solution 4:

Future value = $800

Discount rate = 6%

Period = 3years

Present value = $800 * PV factor at 6% for 3rd period = $800 * 0.83961 = $671.70

Hence last option is correct.

Solution 5:

A higher discount rate "Produces a smaller present value"

Hence first option is correct.