Question

Your mother deposited $50,000 into a savings account for your retirement. the account will compound interest at 5% annually. you will not be able to withdraw any money from the account until you retire in 40 years. Which of the following is correct?

A. The interest you earn 6 years from now will equal the interest you earn 10 years from now.

B. The present value of this investment is equal to $50,000.

C. The interest amount you earn will double in value every year.

D. The future value of this amount is equal to 50,000 X (1+40)^.06

E. The total amount of interest you will earn will equal 50,000..06x40.

Answer 1

correct answer is option B. The present value of this investment is equal to $50,000.

Present value of investment will remain $50000.

Reason why other statement are wrong/false -

A. Interest earned for 10 year will be higher compared to interest earned for 10 year as interest rate is compounding.

C. Interest amount will not double in every year. to double the interest amount interest rate has to be 100% and not 5%

D. future value formula = 50000*(1+5%)^40

E. Total interest earned = FV - 50000 .

Hence, correct answer is option B.