7. Suppose you would like to have enough money in 4 years to purchase a new car.
ID: 1115440 • Letter: 7
Question
7. Suppose you would like to have enough money in 4 years to purchase a new car. You want to have $20,000. At an interest rate of 4%, how much do you need to put into your savings account now? Round to the nearest cent. (1 pt.) 8. A speculative bubble: (1 pt. CHOOSE 1) A) explains the rise of Microsoft's stock price over the last 30 years. B) can help the macroeconomy C) can be easily identified, leading to higher than normal returns. D) arises when stock prices rise more rapidly than the actual value of the asset. 9. What is the risk-return trade-off? (1 pt. CHOOSE 1) A) Assets with the least risk tend to outperform the market. B) To invest in less risky assets means higher returns. C) Bonds earn higher returns than stocks because bonds are riskier. D) To earn higher average rates of return, a person must accept higher risk. 10. Rank the following in terms of least to most monetary returns: houses, stocks, bonds. (1 pt.) 11. Suppose you have $100 in your savings account and earn an annual interest rate of 7%. Approximately how long will it take for your savings to double? (1 pt.)Explanation / Answer
7). In this case, we compound the amount annually for 4 years.
Thus Compound Interest Rate Formula = Principle(1 + Rate of interest/100)t
20,000 = Principle(1.04)4
17,096 (approx) = Principle to be invested in bank
8). D). arises when stock prices are higher than the actual value of assets.
The speculative bubbles can lead to huge recessions in market once they burst. Consumers usually tend to overestimate the value of the asset and keep buying more of it in an expectation to earn higher profits in future. But when the bubble bursts, there are huge capital losses in the economy.
9). D). To earn higher average returns, a person must accept higher risk.
This is the first law of any business, which states profit is the reward for risk. And higher risk will lead to higher future profits.
10). Stocks are most uncertain and will thus lead to most monetary returns. This is followed by bond market which is in control of the Fed, and thus have lesser fluctuations as compared to stock market. Housing will have least variable returns since building and infrastructure usually take time to build fully, and thus the level of variability in this market is comparative less.
11). We can equate the compound interest equation to 200 (double of 100)
Thus, 200 = 100(1.07)t
2 = 1.07t
Thus, t = 10 (approx). It will take approx. 10 years for the amount to double.
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