Question

Answer all of these questions with the right question number next to the correct choice. ANSWER ALL OR NONE

8-If your invest $4,050 today, what interest rate would you need to earn in order to have $5,500 at the end of 5 years?

A)5.79%

B)6.31%

C)0.06%

D)1.36%

9-When is the EAR equal to the APR?

A)When interest is compounded quarterly

B)When interest is compounded annually

C)When interest is compounded monthly

D)When interest is compounded semi-annually

10-The owner plans to invest the profits from his dealership in an attempt to raise capital to open a brand new used car lot somewhere down the line. If he invests $200,000 today at 6% compounded monthly, how much will the owner have in 6 years?

A)$285,152.18

B)$286,408.86

C)$285,900.56

D)$283,703.82

11-What if the new cars that the owner/salesman plans to buy are delayed by 3 months? Assuming that he deposits $280,000 today at 7% compounded quarterly, how much money will he have when the cars ship in 1 year and 3 months?

A)$300,120.53

B)$304,710.73

C)$305,372.64

D)$294,958.75

Answer 1

1)

Interest rate = (Future value / initial value)^1/n - 1

Interest rate = (5500 / 4050)^1/5 - 1

Interest rate = (1.35802)^1/5 - 1

Interest rate = 1.0631 - 1

Interest rate = 0.0631 or 6.31%

2)

B)When interest is compounded annually

When interest is compounded annually, effective annual rate(EAR) will always be equal to annual effective rate.

3)

Number of periods = 6 * 12 = 72

Monthly rate = 6% / 12 = 0.5%

Future value = Present value (1 + rate)^time

Future value = 200,000 (1 + 0.005)^72

Future value = 200,000 * 1.43204

Future value = $286,408.86

4)

There are 5 quarters

Quarterly rate = 7% / 4 = 1.75%

Future value = Present value (1 + rate)^time

Future value = 280,000 (1 + 0.0175)^5

Future value = 280,000 * 1.09062

Future value = $305,372.64

Future value =