All other things being equal, the numerical difference between a present and a f
ID: 2820279 • Letter: A
Question
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%, 12%, or 23%. Identify the interest rate that corresponds with each line VALUE (Dollars 0 1 2 3 4 5 6 7 8 9 10 TIME IYears) Line A: Line B: Line C: Investments and loans base their interest calculations on one of two possible methods: the the 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 interest and interest methods. Both methods apply three variables-the amount of principal, the interest Assume that the variables I, 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? Simple interest? 0 FV= PV x (PV x 1 x N)Explanation / Answer
A = 23%
B = 12%
C = 0%
Simple interest and compound interest methods
Compound interest : FV = PV*(1+I)^N
Simple interest : FV = PV + (PV*I*N)
1st statement is true. if you put N = 1 in above 2 formulas, you will have same answer
2nd statement is false. Compound interest is always more than the simple interest from 2nd year onwards
3rd statement is true. Account with compound interest will grow more quickly than simple interest
Investment to be done = 45000
Time = 3 years
L - 9 % compound interest
Amount after 3 years = 45000*(1.09)^3 = 58276.30
M - 8 % simple interest
Amount after 3 years = 45000*(1.15)^3 = 68439.37
P - 15 % compound interest
Amount after 3 years = 45000*(1.15)^3 = 68439.37
So she should invest in P and not in L or M