Answer Questions

1.What is the difference between simple interest and compound interest?

2.Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years.

a.How much would you have at the end of 15 years using compound interest?

b.How much would you have using simple interest?

3.What is the relationship between present value and future value?

4.Suppose you need $15,000 in 3 years. If you can earn 6% annually, how much do you need to invest today?

5.If you could invest the money at 8%, would you have to invest more or less than your answer above? How much?

6.Suppose you are offered the following investment choices:

a.You can invest $500 today and receive $600 in 5 years. The investment is considered low risk.

b.You can invest the $500 in a bank account paying 4%.

7.What is the implied interest rate for the first choice and which investment should you choose?

8.Suppose you want to buy some new furniture for your family room. You currently have $500 and the furniture you want costs $600. If you can earn 6%, how long will you have to wait if you don't add any additional money?