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1 Name: Class: Date: Unit 6 Financial Problems Practice Test Remember the following formulae: Simple Interest: I = Prt Compound Interest: A =P(1 + i) n 1. In the two formula above, what is the difference between: a) r and i b) t and n 2. An investment matures in 7 years. Find n when the interest is compounded quarterly. 3. An investment earns 5% per year. Find i when the interest is compounded semi-annually. 4. Consider a mortgage of $ amortized over 15 years at 9.6% compounded monthly. (Assume the same interest rate for the entire 15 years). a) What would be the monthly mortgage payments? b) How much would be paid to the bank in total over the 15 years? c) How much would be paid in interest over the 15 years? 5. Determine the resale value of a 4-year-old vehicle with a MSRP of $ and an annual depreciation rate of 24%. 6. Alexie invested $500 at 6% compounded annually for 7 years. Meja invested $500 at 7% compounded annually for 6 years. a) Which investment earned more money? b) How much more? 7. Find the interest earned on this investment: $ at 5% compounded quarterly for 12 years. 8. Calculate the missing items in the chart. We are dealing with simple interest here. Principal Rate Time Interest a 5% 5 years $ b $ % $8.22 c $895 8 months $23.84 d 6% 450 days $ Sandra wants to have $ in 3 years time when she begins college. She can invest her money at 5.5% interest compounded semi-annually. How much must she invest? 10. Which is the better investment: 10% compounded monthly or 10.5% compounded quarterly? By how much? Explain your answer using examples. 11. Martha deposits $1000 in a simple interest savings account that pays annual interest at 5%. How much interest will she earn after 4 months? 1

2 Name: 12. Yasser won a lottery. He will receive a payment of $2000 per month for the next 5 years. The first payment will be made 1 month from now. a) What amount must the lottery company invest today at 8% compounded monthly to provide Yasser s prize? b) How much money in total will Yasser receive from the lottery company? c) How much money did the lottery company save by giving Yasser an annuity instead of a lump sum of money today? 13. Halima has taken out a personal loan of $ which she will pay off with 60 monthly payments starting 1 month from now. The interest is 12.8% compounded monthly. a) Determine the monthly payment b) Determine the total she will pay over the 60 months. c) Determine how much interest she will pay over the 60 months. d) If Halima was able to pay off her loan in 48 months, how much interest would she save over paying it off in 60 months? 14. Maurice who has just turned 69 years old is converting his RRSP into an annuity; he wishes to receive $1500 every 6 months for the next 20 years, starting 6 months from now. The annuity is guaranteed to earn 6.25% compounded semi-annually. (App/6) a) How much must he deposit now to pay for the annuity? b) How much interest does the annuity earn over the 20 years? 15. A bank charges 7.75% compounded monthly on a mortgage. The Petersons have an excellent credit rating. They negotiated a rate of 7% compounded monthly on a mortgage of $ amortized over 25 years. By how much did the Petersons reduce their monthly payment by negotiating the lower rate of interest? 16. Bernice has a 90-day term deposit of $3500 that pays annual interest of 4.8%. How much interest did Bernice receive? (this is a simple interest account) 17. Lai invested $4150 for 18 months and received $ interest at maturity. At what annual rate did Lai invest her money? (Simple Interest) Essay 18. Explain why it is better to contribute to an RRSP early and often. 19. Explain the difference between the amortization period and the term of the mortgage. (2C) 20. List three ways in which a homeowner could reduce the total amount paid on his/her mortgage. 21. a) Why do banks not want to commit to the same interest rate for more than 5 years? b) Why do borrowers not want to commit to the same interest rate for more than 5 years? 22. Explain why you would earn more money using compound interest than simple interest given that the rate is the same. 2

3 Unit 6 Financial Problems Practice Test Answer Section NUMERIC RESPONSE 1. ANS: a) r is always the interest rate per year. i is the interest rate per compounding period. b) t is always the time in years. n is the total number of payment periods. 2. ANS: ANS: ANS: a) i = 0.96/12 =0.008 n = 15 x 12 = 180 pv = r = $ b) $ c) $ ANS: $ ANS: Alexie s investment $ ANS: A= (1+.05/4)48= I = ANS: a)$ b) app 30 days c) App 4% d) $ SHORT ANSWER 9. ANS: P=10000/( /2)6 = ANS: A = 100(1+0.1/12)12 = A = 100( /4)4 = c 11. ANS: P = $1000, r =5% = 0.05 t = 4/12 I = Prt = 1000(0.05)(4/12) = = $

4 PROBLEM 12. ANS: $ $2000 x 12 x 5 = = ANS: a) b) $12, c) interest is d) Monthly payment $ Total payment: $ (interest is ) Save ANS: a)r = 1500; n = 40; i = / 2 = P = $ b) Total received: $1500 x 40 = Interest = $ = ANS: i = , n = 300, PV = R = ( x (00775/12)) / (1-(1+(0.0775/12)) ^ -300) = $ (over 25 years = $ ) i = 0.07, n = 300, PV = R = ( x (007/12)) / (1-(1+(0.07/12)) ^ -300) = $ (over 25 years = $ ) Diff = = $11.67/ month ($33,501 over 25 years) 16. ANS: I = PRT = 3500 x x (90/365) = $ ANS: r = I/Pt = /(4150 * 1.5) = = 5.25% ESSAY 18. ANS: bob 19. ANS: Chapter 6 AP - time over which a mortgage is paid T - length of time a specific rate of interest is paid 2

5 20. ANS: lower interest rate, shorter amortization period, larger monthly payment, lump sum, accellerated weekly payments, larger down-payment 21. ANS: Rates might go up. Rates might go down. 22. ANS: bob 3