2. Simple versus compound interest Financial contracts involving Investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed interest rates are used throughout this question. Addison deposited $1,100 at her local credit union in a savings account at the rate of 7.4% peld as simple interest. She will earn interest once a year for the next 11 years. If she were to make no additional deposits or withdrawals, how much money would the credit union owe Addison in 11 years? O $2,412.35 O $1,187.42 O $181.40 O $1,995.00 Now, assume that Addison's credit union pays a compound interest rate of 7.4% compounded annually. All other things being equal, how much will Addison have in her account after 11 years? $178.51 O $1,995.40 $2,412.35 $1,181.40 Before deciding to deposit her money at the credit union, Addison checked the interest rates at her local bank as well. The bank was paying a nominal interest rate of 7.4% compounded quarterly. If Addison had deposited $1,100 at her local bank, how much would she have had in her account after 11 years? $2.464.21 $181.40 $195.84 $1,183.69 3. Future value The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications inwolves the calculation of a future value This process requires knowledge of the values of three of The process for converting present values into future values is called four time-value-of-money variables. Which of the following is not one of these variables? The interest rate (1) that could be earned by invested funds The Inflation rate indicating the change in average prios The present value (PV) of the amount invested The duration of the investment (N) All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 10%, or 20%. Identify the interest rate that corresponds with each line. VALUE [Dollars! Start c 0 1 2 5 5 6 7 10 TIME Years Une A: Line B: Line C Investments and loans base their interest calculations on one of two possible methods: the Interest and the Interest methods. Both methods apply three variables the amount of principal, the interest rate, and the investment or deposit period to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables Assume that the variables 1, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or Invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest? OPV-PVX (1+1) OFV-(1+1)N/PV FV-PV + (PVX1XN) Simple interest O TV - PV XIXN FV-PV (PV x 1 x N) FV-PV + (PVxIxN) Identify whether the following statements about the simple and compound interest methods are true or false True False Statement O The process of earning compound interest allows a depositor or investor to eam interest on any interest earned in prior periods. After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year Yuri is willing to invest $30,000 for six years, and is an economically rational investor. He has identified three Investment alternatives (X, Y, and 2) that vary in their method of calculating interest and in the annual interest rate offored. Since he can only make one investment during the six-year investment period, complete the following table and indicate whether Yurl should west in each of the investments Note: When calculating each Investment's future value, assume that all interest is eamed annually. The final value should be rounded to the nearest whole dollar. Make this investment? Investment X Expected Future Value $ Interest Rate and Method 11% compound interest 13% compound interest 13% simple interest $ $