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What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

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The future value formula is:FV = PV (1 +...

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-You hope to buy your dream car four years from now.Today,that car costs $82,500.You expect the price to increase by an average of 4.8 percent per year over the next four years.How much will your dream car cost by the time you are ready to buy it? A) $98,340.00 B) $98,666.67 C) $99,517.41 D) $99,818.02 E) $100,023.16 -You hope to buy your dream car four years from now.Today,that car costs $82,500.You expect the price to increase by an average of 4.8 percent per year over the next four years.How much will your dream car cost by the time you are ready to buy it?


A) $98,340.00
B) $98,666.67
C) $99,517.41
D) $99,818.02
E) $100,023.16

F) A) and D)
G) A) and C)

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At an interest rate of 10 percent and using the Rule of 72,how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding,shouldn't it take less time for the money to double the second time?

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It will take 7.2 years to double the ini...

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-Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period? A) 3.89 percent B) 4.20 percent C) 4.56 percent D) 5.01 percent E) 5.40 percent -Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?


A) 3.89 percent
B) 4.20 percent
C) 4.56 percent
D) 5.01 percent
E) 5.40 percent

F) D) and E)
G) A) and B)

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-You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs? A) 18.78 years B) 19.96 years C) 21.90 years D) 23.08 years E) 25.00 years -You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs?


A) 18.78 years
B) 19.96 years
C) 21.90 years
D) 23.08 years
E) 25.00 years

F) B) and C)
G) C) and D)

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Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:


A) growth analysis.
B) discounting.
C) accumulating.
D) compounding.
E) reducing.

F) A) and C)
G) None of the above

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-Your older sister deposited $5,000 today at 8.5 percent interest for 5 years.You would like to have just as much money at the end of the next 5 years as your sister will have.However,you can only earn 7 percent interest.How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years? A) $321.19 B) $360.43 C) $387.78 D) $401.21 E) $413.39 -Your older sister deposited $5,000 today at 8.5 percent interest for 5 years.You would like to have just as much money at the end of the next 5 years as your sister will have.However,you can only earn 7 percent interest.How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?


A) $321.19
B) $360.43
C) $387.78
D) $401.21
E) $413.39

F) C) and D)
G) A) and B)

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-Suppose you are committed to owning a $140,000 Ferrari.You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years.How much must you invest today to fund this purchase assuming the price of the car remains constant? A) $74,208.16 B) $81,688.66 C) $87,911.08 D) $98,019.82 E) $99,446.60 -Suppose you are committed to owning a $140,000 Ferrari.You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years.How much must you invest today to fund this purchase assuming the price of the car remains constant?


A) $74,208.16
B) $81,688.66
C) $87,911.08
D) $98,019.82
E) $99,446.60

F) A) and B)
G) A) and C)

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Interest earned on both the initial principal and the interest reinvested from prior periods is called:


A) free interest.
B) dual interest.
C) simple interest.
D) interest on interest.
E) compound interest.

F) A) and B)
G) C) and D)

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Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:


A) free interest.
B) bonus income.
C) simple interest.
D) interest on interest.
E) present value interest.

F) A) and C)
G) B) and C)

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You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

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Simple interest is interest earned on th...

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Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account,she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?


A) simplifying
B) compounding
C) aggregation
D) accumulation
E) discounting

F) B) and E)
G) A) and E)

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You invested $1,400 in an account that pays 5 percent simple interest.How much more could you have earned over a 20-year period if the interest had compounded annually?


A) $749.22
B) $830.11
C) $882.19
D) $901.15
E) $914.62

F) A) and B)
G) None of the above

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-According to the Rule of 72,you can do which one of the following? A) double your money in five years at 7.2 percent interest B) double your money in 7.2 years at 8 percent interest C) double your money in 5 years at 14.4 percent interest D) triple your money in 7.2 years at 5 percent interest E) triple your money at 10 percent interest in 7.2 years -According to the Rule of 72,you can do which one of the following?


A) double your money in five years at 7.2 percent interest
B) double your money in 7.2 years at 8 percent interest
C) double your money in 5 years at 14.4 percent interest
D) triple your money in 7.2 years at 5 percent interest
E) triple your money at 10 percent interest in 7.2 years

F) A) and C)
G) None of the above

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C

-You would like to give your daughter $75,000 towards her college education 17 years from now.How much money must you set aside today for this purpose if you can earn 8 percent on your investments? A) $18,388.19 B) $20,270.17 C) $28,417.67 D) $29,311.13 E) $32,488.37 -You would like to give your daughter $75,000 towards her college education 17 years from now.How much money must you set aside today for this purpose if you can earn 8 percent on your investments?


A) $18,388.19
B) $20,270.17
C) $28,417.67
D) $29,311.13
E) $32,488.37

F) A) and D)
G) D) and E)

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-You just received $225,000 from an insurance settlement.You have decided to set this money aside and invest it for your retirement.Currently,your goal is to retire 25 years from today.How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent? A) $417,137 B) $689,509 C) $1,050,423 D) $1,189,576 E) $1,818,342 -You just received $225,000 from an insurance settlement.You have decided to set this money aside and invest it for your retirement.Currently,your goal is to retire 25 years from today.How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?


A) $417,137
B) $689,509
C) $1,050,423
D) $1,189,576
E) $1,818,342

F) C) and D)
G) B) and C)

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-One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn? A) 6.59 percent B) 6.67 percent C) 6.88 percent D) 6.92 percent E) 7.01 percent -One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn?


A) 6.59 percent
B) 6.67 percent
C) 6.88 percent
D) 6.92 percent
E) 7.01 percent

F) B) and C)
G) A) and E)

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Sue and Neal are twins.Sue invests $5,000 at 7 percent when she is 25 years old.Neal invests $5,000 at 7 percent when he is 30 years old.Both investments compound interest annually.Both Sue and Neal retire at age 60.Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?


A) Sue will have less money when she retires than Neal.
B) Neal will earn more interest on interest than Sue.
C) Neal will earn more compound interest than Sue.
D) If both Sue and Neal wait to age 70 to retire,then they will have equal amounts of savings.
E) Sue will have more money than Neal as long as they retire at the same time.

F) D) and E)
G) C) and E)

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-Assume the total cost of a college education will be $300,000 when your child enters college in 16 years.You presently have $75,561 to invest.What rate of interest must you earn on your investment to cover the cost of your child's college education? A) 7.75 percent B) 8.50 percent C) 9.00 percent D) 9.25 percent E) 9.50 percent -Assume the total cost of a college education will be $300,000 when your child enters college in 16 years.You presently have $75,561 to invest.What rate of interest must you earn on your investment to cover the cost of your child's college education?


A) 7.75 percent
B) 8.50 percent
C) 9.00 percent
D) 9.25 percent
E) 9.50 percent

F) C) and E)
G) None of the above

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C

-Sixteen years ago,Alicia invested $500.Eight years ago,Travis invested $900.Today,both Alicia's and Travis' investments are each worth $2,400.Assume that both Alicia and Travis continue to earn their respective rates of return.Which one of the following statements is correct concerning these investments? A) Three years from today,Travis' investment will be worth more than Alicia's. B) One year ago,Alicia's investment was worth more than Travis' investment. C) Travis earns a higher rate of return than Alicia. D) Travis has earned an average annual interest rate of 3.37 percent. E) Alicia has earned an average annual interest rate of 6.01 percent. -Sixteen years ago,Alicia invested $500.Eight years ago,Travis invested $900.Today,both Alicia's and Travis' investments are each worth $2,400.Assume that both Alicia and Travis continue to earn their respective rates of return.Which one of the following statements is correct concerning these investments?


A) Three years from today,Travis' investment will be worth more than Alicia's.
B) One year ago,Alicia's investment was worth more than Travis' investment.
C) Travis earns a higher rate of return than Alicia.
D) Travis has earned an average annual interest rate of 3.37 percent.
E) Alicia has earned an average annual interest rate of 6.01 percent.

F) A) and B)
G) D) and E)

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B

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