Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years. What annual rate of interest will you be paying?
Answer: FVIF[? %, 5 yr] $3,000 = $5,775
FVIF[? %, 5 yr] = $1.925
i = 14%
Briefly discuss how non-annual compounding (more than one compounding period per year) is preferable to annual compounding if you are an investor.
Answer: Non-annual compounding is preferable to annual compounding because with non-annual compounding, interest is compounded more frequently within a year period. This means that more interest on interest would be generated on a given investment.
If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?
Answer: FV[10] = $1,000(12.006) = $12,006
Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980. What was the compound annual growth rate in earnings-per-share over the period?
Answer: $12.68 = $7.99 FVIF[? %, 6 yr]
1.587 = FVIF[? %, 6 yr]
g = 8%
If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return have you earned?
Answer: $6,185 = $450 FVIF[? %, 20 yr]
13.743 = FVIF[? %, 20 yr]
i = 14%
