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Chapter 5

Practice problems with solution (Source: Test Bank)

160. Robin invested $10,000 in an account that pays 5 percent simple interest. How much more

could she have earned over a 40-year period if the interest had compounded annually?

A. $38,207.16

B. $38,414.14

C. $40,399.89

D. $48,414.14

E. $50,399.89

LO3: Simple vs. Compound Interest

Level: Basic

Type: Problems

161. Alex and Courtney are each investing $1,200 today in a savings account. Alex will earn 4

percent interest compounded annually. Courtney will earn 4 percent simple interest. After five

years Alex will have ____ more than Courtney.

A. $19.98

B. $20.13

C. $20.17

D. $20.21

E. $20.28

LO3: Simple vs. Compound Interest

Level: Basic

Type: Problems

162. What is the future value of $4,160 invested for eight years at 8.5 percent compounded

annually?

A. $6,988.80

B. $7,989.71

C. $8,122.20

D. $8,211.29

E. $8,404.12

LO1: Future Value

Level: Basic

Type: Problems

163. Today, you earn a salary of $37,800. What will your annual salary be twelve years from

now if you receive annual raises of 3.6 percent?

A. $55,981.03

B. $56,324.17

C. $56,907.08

D. $57,784.17

E. $58,213.46

LO1: Future Value

Level: Basic

Type: Problems

164. You own a stamp collection that is currently valued at $24,500. If the value increases by 5.5

percent annually, how much will the collection be worth when you retire 40 years from now?

A. $204,113.07

B. $204,981.16

C. $205,155.45

D. $206,666.67

E. $208,576.07

LO1: Future Value

Level: Basic

Type: Problems

165. Your goal is to build your first home seven years from now. The home that you desire

currently costs $215,900. New home prices are increasing by 4.2 percent annually. If home

prices continue rising at that pace, how much will your home cost when you are ready to build

seven years from now?

A. $281,113.21

B. $284,109.67

C. $287,956.36

D. $292,001.06

E. $295,474.06

LO1: Future Value

Level: Basic

Type: Problems

166. Today, your grandmother gave you a gift of $25,000 to help pay for your college education.

She told you that this amount was the result of a one-time investment at 8 percent interest 13

years ago. How much did your grandmother originally invest?

A. $9,192.45

B. $9,225.00

C. $9,350.00

D. $9,419.25

E. $9,504.55

LO2: Present Value

Level: Basic Type: Problems

167. What is the present value of $36,500 to be received five years from today if the discount

rate is 6.75 percent?

A. $26,330.16

B. $26,678.19

C. $26,911.47

D. $28,008.19

E. $28,123.76

LO2: Present Value

Level: Basic

Type: Problems

168. You would like to give your daughter $50,000 towards her college education sixteen years

from now. How much money must you set aside today for this purpose if you can earn 7.8

percent on your funds?

A. $14,775.50

B. $15,033.84

C. $15,250.00

D. $16,245.33

E. $16,909.13

LO2: Present Value

Level: Basic

Type: Problems

169. One year ago, you invested $5,000. Today, your investment is worth $6,178.40. What rate

of interest did you earn?

A. 16.23 percent

B. 16.45 percent

C. 22.18 percent

D. 23.57 percent

E. 24.09 percent

LO3: Interest Rate for a Single Period


170. Thirty years ago, your father invested $6,000. Today that investment is worth $67,270.98.

What is the average rate of return your father earned on this investment?

A. 8.39 percent

B. 8.44 percent

C. 10.23 percent

D. 10.34 percent

E. 11.67 percent

LO3: Interest Rate for Multiple Periods

Level: Basic

Type: Problems

171. Twenty years ago, Max invested $10,000. Thirty years ago, Julie invested $5,000. Today,

both Max and Julie's investments are each worth $35,000. Which one of the following statements

is correct concerning their investments? Assume that they will continue earning the same rate of

return.

A. Two years from now, Max's investment will be worth more than Julie's.

B. Last year, Julie's investment was worth more than Max's.

C. Max has earned more interest on interest than Julie.

D. Julie has earned an average annual interest rate of 6.7 percent.

E. Max has earned an average annual interest rate of 6.41 percent.


Level: Intermediate

Type: Problems

172. New Metals, Inc. is planning on expanding their operations when the economy strengthens

in a few years. At that time they will need to purchase additional equipment. Four years ago, they

set aside $300,000 in a special account for this purpose. Today, that account is worth

$383,048.98. What rate of interest is New Metals earning on this money?

A. 5.87 percent

B. 5.92 percent

C. 6.26 percent

D. 6.30 percent

E. 6.35 percent



173. Kay purchased some land costing $124,600. Today, that same land is valued at $179,400.

How long has she owned this land if the price of land has been increasing at 6 percent per year?

A. 5.95 years

B. 6.26 years

C. 6.33 years

D. 6.50 years

E. 6.57 years

LO4: Number of Time Periods

Level: Basic

Type: Problems

174. When you were 26 years old, you received an inheritance of $1,500 from your grandfather.

You invested that amount in Nu-Wave stock and have not touched the investment since then.

Today, this investment is worth $109,533.59. Nu-Wave stock has earned an average rate of

return of 11.3 percent per year over this time period. How old are you today?

A. age 57

B. age 59

C. age 62

D. age 64

E. age 66

LO4: Number of Time Periods

Level: Basic

Type: Problems

175. Your goal is to have $50,000 in cash to build a new home twelve years from now. Your

plan is to make one deposit today to fund this goal. How much more will you have to deposit

today to fund this goal if you can only earn 4 percent on your savings rather than 5 percent?

A. $3,104.11

B. $3,188.87

C. $3,218.07

D. $3,273.16

E. $3,387.98

LO3: Present Value and Rate Changes


176. Your goal is to have two separate investments that will be worth $10,000 each ten years

from today. Investment A will pay 6 percent interest. Investment B will pay 6.5 percent interest.

You will make a one-time deposit into each account today. What is the difference between the

amount you must invest today in Investment A as compared to the amount you must invest today

in Investment B if you are to reach your goal in ten years?

A. $241.92

B. $245.45

C. $256.69

D. $261.08

E. $263.47


Level: Basic

Type: Problems

177. Twenty years from now, you would like to purchase a cottage located on the shores of your

favourite lake. You expect that you will have $250,000 available at that time for this purchase.

You could afford a home that is currently selling for ____ if the homes increase in value by 3

percent annually, but if the homes increase in value by 5 percent annually, you can only afford a

home priced at _____ today.

A. $127,023; $92,687

B. $138,419; $94,222

C. $138,419; $114,097

D. $144,676; $100,469

E. $144,676; $111,068


Level: Intermediate Type: Problems

178. You would like to invest some money today such that your investment will be worth

$100,000 fifteen years from now. Your broker gives you two options. First, you can invest at a

guaranteed annual rate of 4 percent. Or, you can invest in stocks and hopefully earn an average

of 7 percent per year. How much more will you have to invest today if you opt for the fixed rate

rather than the stocks?

A. $18,145.45

B. $18,419.02

C. $18,623.18

D. $18,904.21

E. $19,281.85


Level: Basic

Type: Problems

179. Omar has an investment valued at $12,345 today. He made a one-time investment at 6.5

percent four years ago. Leon has an investment that is also valued at $12,345 today. Leon

invested four years ago at 7.5 percent. Omar originally invested _____ and Leon invested

_____.

A. $9,568.24; $9,199.16

B. $9,596.05; $9,243.94

C. $9,608.14; $9,267.67

D. $9,633.33; $9,304.06

E. $9,652.18; $9,389.00



180. When you retire thirty years from now, you want to have $750,000. You think you can earn

an average of 9 percent on your money. To meet this goal, you are trying to decide whether to

deposit a lump sum today, or to wait and deposit a lump sum five years from today. How much

more will you have to deposit as a lump sum if you wait for five years before making the

deposit?

A. $28,788.03

B. $29,414.14

C. $30,447.53

D. $36,118.09

E. $38,278.27

LO4: Present Value and Time Changes

Level: Basic

Type: Problems

181. Jeanette needs $15,000 as a down payment for a house six years from now. She earns 3.5

percent on her savings. Jeanette can either deposit one lump sum today for this purpose or she

can wait a year and deposit a lump sum. How much additional money must Jeanette deposit if

she waits for one year rather than making the deposit today?

A. $121.03

B. $166.67

C. $307.00

D. $333.33

E. $427.09



182. Theresa wants to save $10,000 so that she can surprise her husband with a vacation six

years from now. She can earn 7 percent on her savings. How much more will she have to deposit

if she waits one more year before investing versus if she deposits one lump sum today?

A. $466.44

B. $469.15

C. $470.23

D. $471.08

E. $471.54


Level: Basic

Type: Problems

183. Moe and Joe are twins. Moe invested $1,000, earned 9 percent annually, and now has

$1,992.56. Joe invested $1,000, earned 6.47 percent, and now has $1,992.97. Joe invested his

money _____ years before Moe.

A. 2.5 years

B. 2.8 years

C. 3.0 years

D. 3.2 years

E. 3.5 years


Level: Basic

Type: Problems

184. Sue invested $5,000 eleven years ago at 12 percent. Terri has the same amount saved today

as Sue has. Terri also earns 12 percent but she only invested $2,500. How long ago did Terri

invest her money?

A. 17.1 years

B. 17.4 years

C. 17.9 years

D. 21.5 years

E. 22.0 years



185. You have just been awarded a $200,000 insurance settlement. The insurance company has

offered to invest this amount at a guaranteed interest rate of 4.5 percent for ten years. You think

you can invest this money yourself and earn an average return of 8 percent. If you are able to do

that, how much more will your settlement be worth ten years from now than if you had left the

funds with the insurance company?

A. $78,829.69

B. $86,991.91

C. $118,009.42

D. $121,191.12

E. $137,188.23

LO3: Future Value and Rate Changes

Level: Basic

Type: Problems

186. You have just landed your first job. Part of the offer includes a $4,000 new employee bonus

which is intended to cover your relocation costs. You have determined that you can move

yourself for $1,000. Thus, you have decided to open an Individual Retirement Account with the

remaining $3,000. How much more will this investment be worth 35 years from now if you can

earn an average rate of return of 9.5 percent rather than 9 percent?

A. $10,639.32

B. $10,676.16

C. $11,207.91

D. $11,341.41

E. $11,454.54

LO3: Future Value and Rate Changes


187. You deposit $3,000 in a retirement account today at 5.5 percent interest. How much more

money will you have if you leave the money invested for forty-five years rather than forty

years?

A. $7,834.91

B. $7,838.08

C. $7,839.73

D. $7,840.52

E. $7,841.19

LO4: Future Value and Time Changes

Level: Basic

Type: Problems

188. You collect model airplanes. One particular model is currently valued at $275. If this model

increases in value by 5 percent annually, it will be worth ____ six years from now and _____

twelve years from now.

A. $368.01; $442.89

B. $368.01; $461.34

C. $368.53; $442.89

D. $368.53; $467.08

E. $368.53; $493.86

LO4: Future Value and Time Changes

Level: Basic

Type: Problems

189. Frank invests $2,500 in an account that pays 6 percent simple interest. How much money

will he have at the end of four years?

A. $2,650

B. $3,100

C. $3,156

D. $3,163

E. $10,600

Ending value = $2,500 + ($2,500 .06 4) = $3,100.00

LO3: Simple Interest Level: Basic

Type: Problems

190. Faith invests $4,500 in an account that pays 4 percent simple interest. How much money

will she have at the end of eight years?

A. $4,680

B. $5,367

C. $5,940

D. $6,122

E. $6,159

Ending value = $4,500 + ($4,500 .04 8) = $5,940.00

LO3: Simple Interest

Level: Basic

Type: Problems

191. Jessica invests $3,000 in an account that pays 5 percent simple interest. How much more

could she have earned over a 7-year period if the interest had compounded annually?

A. $122.20

B. $129.20

C. $147.80

D. $171.30

E. $221.30

Ending value at 5 percent simple interest = $3,000 + ($3,000 .05 7) = $4,050.00;

Ending value at 5 percent compounded annually = $3,000 (1 + .05)7 = $4,221.30;

Difference = $4,221.30 - $4,050.00 = $171.30

LO3: Simple versus Compound Interest Level: Basic

Type: Problems

192. Jeff invests $3,000 in an account that pays 7 percent simple interest. How much more could

he have earned over a 20-year period if the interest had compounded annually?

A. $2,840.00

B. $3,212.12

C. $3,778.54

D. $4,087.18

E. $4,409.05

Ending value at 7 percent simple interest = $3,000 + ($3,000 .07 20) = $7,200.00;

Ending value at 7 percent compounded annually = $3,000 (1 + .07)20

= $11,609.05;

Difference = $11,609.05 - $7,200.00 = $4,409.05

LO3: Simple versus Compound Interest

Level: Basic

Type: Problems

193. What is the future value of $3,497 invested for 15 years at 7.5 percent compounded

annually?

A. $7,431.13

B. $10,347.19

C. $14,289.16

D. $14,911.08

E. $15,267.21

Future value = $3,497 (1 + .075)15

= $10,347.19

LO1: Future Value Level: Basic

Type: Problems

194. Today, you earn a salary of $42,500. What will be your annual salary 10 years from now if

you earn annual raises of 3.2 percent?

A. $56,100.00

B. $57,414.06

C. $58,235.24

D. $59,122.08

E. $59,360.45

Future value = $42,500 (1 + .032)10

= $58,235.24


Type: Problems

195. You own a classic automobile that is currently valued at $67,900. If the value increases by 8

percent annually, how much will the automobile be worth 15 years from now?

A. $199,801.33

B. $212,524.67

C. $214,740.01

D. $215,390.28

E. $218,887.79

Future value = $67,900 (1 + .08)15

= $215,390.28

LO1: Future Value


196. You hope to buy your dream house 3 years from now. Today, your dream house costs

$247,900. You expect housing prices to rise by an average of 7.5 percent per year over the next 3

years. How much will your dream house cost by the time you are ready to buy it?

A. $292,063.48

B. $294,882.01

C. $298,600.00

D. $307,965.40

E. $309,425.45

Future value = $247,900 (1 + .075)3 = $307,965.40


Type: Problems

197. Your grandmother invested one lump sum 42 years ago at 3.5 percent interest. Today, she

gave you the proceeds of that investment which totaled $28,204.37. How much did your

grandmother originally invest?

A. $4,500

B. $6,650

C. $7,200

D. $7,500

E. $9,000

Present value = $28,204.37 [1 / (1 + .035)42

] = $6,650.00

LO2: Present Value Level: Basic

Type: Problems

198. What is the present value of $36,800 to be received 6 years from today if the discount rate is

12 percent?

A. $18,644.03

B. $19,407.18

C. $19,414.14

D. $20,211.08

E. $20,390.14

Present value = $36,800 [1 / (1 + .12)6] = $18,644.03

LO2: Present Value Level: Basic

Type: Problems

199. You would like to give your daughter $50,000 towards her college education 15 years

from now. How much money must you set aside today for this purpose if you can earn 9 percent

on your investments?

A. $12,250.00

B. $12,989.47

C. $13,726.90

D. $14,008.50

E. $14,211.11

Present value = $50,000 [1 / (1 + .09)15

] = $13,726.90

LO2: Present Value


200. One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did

you earn?

A. 8.67 percent

B. 9.89 percent

C. 10.67 percent

D. 11.42 percent

E. 11.58 percent

$2,789.50 = $2,500 (1 + r)1; r = 11.58 percent

LO3: Interest Rates Level: Basic

Type: Problems

201. Thirty years ago, your father invested $11,000. Today, that investment is worth $287,047.

What is the average annual rate of return your father earned on his investment?

A. 11.14 percent

B. 11.27 percent

C. 11.38 percent

D. 11.49 percent

E. 12.07 percent

$287,047 = $11,000 (1 + r)30

; r = 11.49 percent

LO3: Interest Rates


202. Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both

Jake's and Tami's investments are each worth $9,700. Assume that both Jake and Tami continue

to earn their respective rates of return. Which one of the following statements is correct

concerning these investments?

A. Three years from today, Jake's investment will be worth more than Tami's.

B. One year ago, Tami's investment was worth more than Jake's.

C. Jake has earned a higher rate of return than Tami.

D. Tami has earned an average annual interest rate of 15.91 percent.

E. Jake has earned an average annual interest rate of 15.47 percent.

Jake $9,700 = $2,000 (1 + r)12

; r = 14.06 percent; Tami: $9,700 = $4,000 (1 + r)6; r = 15.91

percent; The correct answer states that Tami earned 15.91 percent interest.

LO3: Interest Rates

Level: Basic

Type: Problems

203. Tropical Tans is saving money to build a new salon. Three years ago, they set aside $12,000

for this purpose. Today, that account is worth $16,418. What rate of interest is Tropical Tans

earning on this money?

A. 10.88 percent

B. 10.97 percent

C. 11.01 percent

D. 11.14 percent

E. 11.23 percent

$16,418 = $12,000 (1 + r)3; r = 11.01 percent.

LO3: Interest Rates Level: Basic

Type: Problems

204. Five years ago, Precision Tool set aside $50,000 in case of a financial emergency. Today,

that account has increased in value to $64,397. What rate of interest is the firm earning on this

money?

A. 5.19 percent

B. 5.47 percent

C. 6.18 percent

D. 6.32 percent

E. 6.45 percent

$64,397 = $50,000 (1 + r)5; r = 5.19 percent

LO3: Interest Rates


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