FOM 12 - Chapter 1 PreTest

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1 Date: Name: FOM 12 - Chapter 1 PreTest 1. Determine the future value of a simple interest investment where 5% interest paid monthly for 1.5 years on $1000. A. $1000 B. $1050 C. $1075 D. $ Determine the interest earned on a simple interest investment where 1.75% interest is paid weekly for 5 years on $260. A. $18.20 B. $20.80 C. $22.75 D. $ Principal of $1700 is invested at 8.2% simple interest, paid annually, for 7 years. What is the rate of return? A. 57% B. 36% C. 63% D. 75% 4. How many compounding periods are there for $850 invested for 10 years at 4.75% compounded quarterly? A. 2.5 B. 10 C. 30 D Determine the future value and the total interest earned for the investment. Compound Principal (P) ($) Interest Rate per Annum (%) Compounding Frequency Term monthly 4.5 years A. $ ; $ B. $ ; $ C. $ ; $ D. $ ; $ Use the Rule of 72 to estimate the investment s doubling time and then determine the actual doubling time. Compound Principal (P) ($) Interest Rate per Annum (%) Compounding Frequency Term quarterly 15 years A. 10 years; 9.97 years B. 10 years; 9.71 years C. 10 years; 10.2 years D. 10 years; 9.63 years

2 Page 2 7. A $6000 investment grows to $ in 5.5 years. If the investment has interest compounded monthly, determine the interest rate. A. 3.7% B. 3.5% C. 3.3% D. 3.2% 8. A $700 investment earns $37.63 in interest in 30 months. If the investment has interest compounded quarterly, determine the interest rate. A. 1.4% B. 1.7% C. 2.1% D. 2.3% 9. A $ investment grows to $ in 25 years. If the investment has interest compounded semi-annually, determine the interest rate. A. 5.12% B. 5.19% C. 5.15% D. 5.09% 10. Determine the term of a $ investment with an interest rate of 2.95%, compounded monthly, if the future value is $ A years B years C years D years 11. A 10-year bond has an interest rate of 5.5%, compounded annually, and a future value of $1000. Determine the ratio of future value to present value. A B C D Determine the future value of weekly payments of $30 into an account that pays 1.75% interest, compounded weekly, for 1 year. A. $ B. $ C. $ D. $ Determine the future value of monthly payments of $200 into an account that pays 4.6% interest, compounded monthly, for 15 years. A. $ B. $ C. $ D. $ Determine the regular monthly payment required to have $5000 at the end of 4 years if the investment earns 5.3% interest, compounded monthly. A. $89.61 B. $95.22 C. $86.03 D. $93.74

3 Page Regular semi-annual payments of $400 are deposited into an account paying 6.15% interest, compounded semi-annually. If the final value of the account is $46 000, how long was the money invested? A years B years C years D years 16. This portfolio was started 3 years ago. What is the current value of the portfolio? A $1200 GIC that earns 2.65%, compounded quarterly Monthly deposits of $250 into an account earning 1.75%, compounded monthly A. $ B. $ C. $ D. $ This portfolio was started 8 years ago. What is the current value of the portfolio? A $4000 bond earning 2.9%, compounded semi-annually Quarterly deposits of $650 into an account earning 3.25%, compounded quarterly A. $ B. $ C. $ D. $ This portfolio was started 20 years ago. What is the current value of the portfolio? Semi-annual deposits of $3000 into an account averaging 3.4%, compounded semi-annually A $ bond earning 7.8%, compounded monthly A. $ B. $ C. $ D. $ This portfolio was started 10 years ago. What is the current value of the portfolio? Quarterly deposits of $650 into an account earning 3.25%, compounded quarterly A $ investment averaging 4.5%, compounded annually A. $ B. $ C. $ D. $ This portfolio was started 17 years ago. What is the portfolio s current rate of return? A 17-year $ bond earning 7.25%, compounded semi-annually Quarterly deposits of $300 into an account averaging 4.7%, compounded quarterly A % B % C % D %

4 Page 4 Short Answer 1. Rahim has $ that he wants to invest, hoping that he can end up with $ to go on his dream vacation. He has an opportunity to invest at 3.7% simple interest, paid annually. How long will it take, to the nearest year, before Rahim can go on his dream vacation? 4. Consider these rates: Bank A offers 3.7%, compounded daily. Bank B offers 2.9%, compounded monthly. Bank C offers 3.4%, compounded semi-annually. Rank the rates from greatest to least return on an investment of $ for a term of 1.5 years. 2. Determine the difference in the interest earned at maturity on these two investments. Who earned the most interest? Noor invested $6000 in a GIC for a term of 6 years with a simple interest rate of 6%, paid annually. Midori invested $6000 in a GIC for a term of 6 years with a compound interest rate of 6%, paid annually. 5. Estimate how long it would take for $1000 to grow to $2000 at each interest rate, compounded monthly. a) 3% b) 4.5% 3. Trahn wants to buy a new sound system but he has only $1000, half the amount he needs. When can Trahn buy the sound system if he invests his money at 3.7%, compounded quarterly, to the nearest year? 6. Estimate how long it would take for $50 to grow to $200 at each interest rate, compounded monthly. a) 7% b) 14% 7. Harro has invested $160 at the end of each month, at 5.59% compounded monthly, for 7 years. How much interest has he earned?

5 Page 5 8. How long will it take for monthly payments of $145 to grow to more than $ if the interest rate is 4.15%, compounded monthly? 9. Bella has created the following investment portfolio: Every month, for the past 7.5 years, she has put $100 from her paycheque into a savings account, earning 1.75%, compounded monthly. She has a $6000 GIC, with a 10-year term, that she purchased 10 years ago and earned 6.2%, compounded annually. What is the current value of her portfolio? 10. Amy opened this portfolio 6 years ago. What will be Amy s rate of return 10 years from now? Monthly deposits of $180 into an account earning 3.25%, compounded monthly A $1600 investment averaging 6.2%, compounded annually Problem 1. a) Doreen plans to invest $ and is researching the best deal online. The table below shows two investment options, with their interest rates and terms. Compare these options by their future values at maturity. Show your work. Investment Option Simple Interest Rate Term (years) C 2.5% paid quarterly 14 D 3.8% paid semi-annually 9 b) Suppose that Doreen decided to invest her money for 1.5 more years. Would your ranking of the investment options change? Explain. 2. Otis bought a $7500 corporate bond. The bond earns 3%, compounded monthly. After 2 years, the interest rate changed to 4.5%, compounded annually. Determine the value of Otis investment after 8 years. Show your work. 3. On Mildred s 20th birthday, she invested $6000 in an account that earns 5%, compounded semi-annually. On her 30th birthday, she moved her investment to an account that paid 6.8%, compounded monthly. Determine the value of her account on her 40th birthday.

6 Page 6 4. Judith is investing $2000. She wants it to grow to $2500 in 4 years. a) What annual rate of interest, compounded annually, does Judith need to meet her goal? Round your answer to two decimal places. Show your work. b) How would your answer change if the compounding frequency was daily? Show your work. 5. Eight months ago, Kevin invested money at 4.9%, compounded weekly. If his investment is worth $ today, how much interest has the account earned in the past 8 months? Show your work.

7 ID: A FOM 12 - Chapter 1 PreTest Answer Section MULTIPLE CHOICE 1. C 2. C 3. A 4. D 5. A 6. B 7. A 8. C 9. C 10. B 11. D 12. C 13. D 14. D 15. C 16. A 17. A 18. A 19. B 20. C SHORT ANSWER years 2. Noor: $ Midori: $ Midori earned $ more interest years 4. Bank A: $570.66, Bank C: $518.72, Bank B: $ Answers may vary. Sample answers: a) 24 years b) 16 years 6. Answers may vary. Sample answers: a) years b) years

8 ID: A 7. $ years 9. $ % PROBLEM 1. a) A = P(1 + rt) C. P is $20 000; r is 2.5% or 0.025; t is 14 A = (1 + (0.025)(14)) A = The future value of Investment C is $ D. P is $20 000; r is 3.8% or 0.038; t is 9 A = (1 + (0.038)(9)) A = The future value of Investment D is $ Investment C has a better return than Investment D. b) Yes, the ranking would change. C. P is $20 000; r is 2.5% or 0.025; t is 15.5 A = (1 + (0.025)(15.5)) A = The future value of Investment C is $ D. P is $20 000; r is 3.8% or 0.038; t is 10.5 A = (1 + (0.038)(10.5)) A = The future value of Investment D is $ Investment D now has a better return than Investment C. 2. First two years: The principal is $7500. The annual interest rate is 3%. The compounding period is monthly, or 12 times per year. The term (in years) is 2. The future value is unknown. The value of the investment after three years is $ Last six years: The principal is $ The annual interest rate is 4.5%. The compounding period is annual, or 1 time per year. The term (in years) is 6. The future value is unknown. The total value of the investment after eight years is $

9 3. First ten years: The principal is $6000. The annual interest rate is 5%. The compounding period is semi-annual, or 2 times per year. The term (in years) is 10. The future value is unknown. The value of the investment after four years is $ Last ten years: The principal is $ The annual interest rate is 6.8%. The compounding period is monthly, or 12 times per year. The term (in years) is 10. The future value is unknown. The total value of the investment after 20 years is $ a) The annual interest rate is unknown. The compounding period is annual, or 1 time per year. The term (in years) is 4. The present value is $2000. The future value is $2500. Judith needs an annual interest rate of 5.74% to meet her goal. b) The annual interest rate is unknown. The compounding period is daily, or 365 times per year. The term (in years) is 4. The future value is $2500. Judith needs an annual interest rate of 5.58% to meet her goal. The interest rate decreased by 0.16%. 5. The present value is unknown. The annual interest rate is 4.9%. The compounding period is monthly, or 12 times per year. The term (in years) is years. The future value is $ The present value of Daniel s investment is $ = 6.07 The investment has earned $6.07 in interest. ID: A