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
FV = PV x (1 + 1)N FV = PV / (1 x 1 x N)
FV = PV + (PV x 1 x N) FV = PV x 1 x N
FV = PV / (1+1)N FV = PV + (PV x 1 x N)
Identify whether the following statements about the simple and compound interest methods are true or false
Statement True False
All other factors being equal, both the simple interest and the
compound interest methods will not generate the same amount
of earned interest by the end of the first year.
All other variables held constant, investments paying simple
interest have to pay significantly higher interest rates to earn the
same amount of interest as an account earning compound interest.
After the end of the second year and all other factors remaining equal,
a future value based on compound interest will exceed a future value
based on simple interest.
Heather is willing to invest $30,000 for three years, and is an economically rational investor. She has identified three investment alternatives (L, M, and P) that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment during the three-year investment period, complete the following table and indicate whether Heather should invest in each of the investments.
Note: When calculating each investment's future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar.
Expected Make this investment?
Investment Interest Rate and Method Future Value Yes No
M 5% compound interest
M 4% simple interest
P 7% compound interest