Financial contracts involving investments, mortgages, loans, and so on are based

Question

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 savingsO $2,920.36 account at the rate of 7.8% paid as simple interest. She will earn 0 $185.80 interest once a year for the next 13 years. If she were to make O $1,192.49 no additional deposits or withdrawals, how much money would the credit union owe Addison in 13 years? O $2,215.40 Now, assume that Addison's credit union pays a compound interest rate of 7.8% compounded annually. All other things being equal, how much will Addison have in her account after 13 O $1,185.80 years? O $227.79 O $2,215.40 O $2,920.36 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 7.8% compounded quarterly. If Addison had deposited $1,100 at her local bank, how much would she have had in her account after 13 years? O $252.48 $185.80 O $1,188.34 o $3,002.82

Explanation / Answer

Future value = Saving in bank account

Present value = Investment value

1.       Simple interest earning case: $2,215.40

Future value = Present value x (1 + Rate x Years)

Future value = 1100 x (1 + 7.8% x 13)

Future value = $2,215.40

2.       Compounded annually case: $2,920.36

Future value = Present value x (1 + Rate)^Years

Future value = $1100 x (1 + 7.8%)^13

Future value = $2,920.36

3.       Compounded quarterly case: $3,002.82

Future value = Present value x (1 + Rate / 4)^(Years x 4)

Future value = 1100 x (1 + 7.8%/4)^(13 x 4)

Future value = $3,002.82

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