How often interest is compounded


Problem 1. The terms of a loan indicate how often interest is compounded.

  • True
  • False

Problem 2. To compound daily means to compound 360 times a year.

  • True
  • False

Problem 3. The number of compounding periods for $6,600.00 at 12% compounded quarterly for 15 years is 30 periods.

  • True
  • False

Problem 4. The effective rate of a transaction can be calculated by dividing the interest for one year by the principal.

  • True
  • False

Problem 5. The interest on $4,200.00 at 8% compounded semiannually for 10 years is $6,292.40.

  • True
  • False

Problem 6. The effective rate is:

  • the stated rate
  • the nominal rate
  • the true semiannual rate
  • the true annual rate
  • none of the above

Problem 7. $15,000.00 for 10 years compounded at 10% quarterly results in how many periods?

  • 120
  • 20
  • 10
  • 40
  • none of the above

Problem 8. In a loan of 8% compounded quarterly, what is the periodic interest

  • 2.5%
  • 6%
  • 2%
  • 4%

Problem 9. Present value does not:

  • find the present dollar amount
  • use the tables
  • know the present dollar amount
  • know the future value
  • none of the above

Problem 10. $25,000.00 for 15 years compounded at 10% quarterly results in a periodic interest rate of:

  • 10%
  • 7%
  • 5%
  • 2.5%
  • none of the above

Problem 11. The effective rate is:

  • the interest for one year divided by the principal
  • the interest for one year divided by the principal for three years
  • the interest for one year divided by the annual rate
  • never related to the compound table
  • none of the above

Problem 12. Josh is having difficulty deciding whether to put his savings in the Mercantile Bank or the Boatmen's Bank. Mercantile offers a 10% rate compounded quarterly while Boatmen's offers 12% compounded semiannually. Josh has $40,000.00 to invest and expects to withdraw the money at the end of 5 years. (Use Table 10-1 from the textbook.) The best deal is:

  • Mercantile Bank
  • Mercantile Bank for the last two years
  • Boatmen's Bank for the first two years
  • Boatmen's Bank
  • none of the above

Problem 13. Don deposited $27,500.00 in Trader's Bank at an interest rate of 12% compounded quarterly. (Use Table 10-1 from the textbook.) The effective rate was:

  • 12.55%
  • 12%
  • 13%
  • 14.0%
  • none of the above

Problem 14. Lisa wants to attend the University of Colorado. She will need to have $80,000.00 five years from today. Lisa is wondering what she will have to put in the bank today so she will have $80,000.00 in five years. Her bank pays 10% compounded quarterly. By using Table  in the textbook, the amount Lisa will need to deposit is:

  • $48,281.68
  • $49,113.60
  • $48,821.60
  • $49,113.06
  • none of the above

Problem 15. John estimates that he will need $15,000.00 for new equipment in 10 years. John decided that he would put aside the money now so that in 10 years the $15,000.00 will be available. His bank offers him 8% interest compounded semiannually. (Use Table 10-3 from the textbook.) How much must John invest?

  • $6,845.85
  • $36,175.71
  • $6,584.80
  • $6,845.08
  • none of the above

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Finance Basics: How often interest is compounded
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