Question

1. (TRUE or FALSE?) The lower the interest rate, the faster the investment will grow. 2....

1. (TRUE or FALSE?) The lower the interest rate, the faster the investment will grow.

2. (TRUE or FALSE?) The higher the interest rate, the lower the future value of an investment.

3. (TRUE or FALSE?) Compound growth occurs when the initial value of a number increases or decreases each period by the factor 1/(1 + growth rate).

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Answer #1

Sol:

1. False

Reason: lower the interest rate lower the investment will grow as investment and interest rate have linear relationship.

2. False

Reason: Higher the interest rate the higher the future value. Here interest rate and future value have linear relationship. Future value also called maturity value.

3. False

Reason: For calculation of compound annual growth we use

(Future Value) / (Initial Value) (1/n)- 1

Here change in initial value does change by 1/n of return.

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