BUSINESS FINANCE FIN 3302 Midterm Exam I Fall 2018-Version A INSTRUCTIONS: Put y

Question

BUSINESS FINANCE FIN 3302 Midterm Exam I Fall 2018-Version A INSTRUCTIONS: Put your name on both your test and the scantron. Only the answers on the scantron will be graded. When you have completed your test, turn in both the test and scantron and sign out on the sheet provided in the front of the classroom. True/False, Multiple choice. Answer all 25 questions on your scantron. Each question is worth 4.0 points. (100 total points) 1. Unless otherwise stated, we generally assume interest in our computations, meaning that interest is earned on both the principal payment and any interest previously earned on the investment. a. Simple b. Compound c. Continuous d. Effective 2. If you want to have $4,985.60 in 33 months, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly. Round to the nearest dollar. a. $5,362 b. $4,876 c. $4,229 d. $3,874 3. Edward's wonderful parents established a college savings plan for him when he was born. They deposited $200 into the account on the last day ofeach month. The account has earned 5.2% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education? Round to the nearest dollar. a. $71,290 b. $68,680 c. $61,525 d. $56,448

Explanation / Answer

Answer is A

Compound interest

For compound interest:

Amount = principal *(1+r)^n. So the interest which we earn previously will also give us return

2. Answer is C

Money to be earned (A) = 4985.60

Time (n)= 33 months

rate (r) = 6% annually or 0.5% monthly

Amount to be invested (P)= ??

A = P*(1+r)^t

So P = A/(1+r)^t

P = 4985.60 / (1.005)^33

P = 4228,9 o 4229

3, Answer is A

Money deposited each month (p)= 200

Interest earned (r)= 5.2% annually or 5.2/12 % monthly

Time = 18 years or 18*12= 216 months

Now money deposited in the 1st month will earn interest for 216 months

So 200*(1.0043)^216

Similarly, money deposited in 2nd month 200*(1.0043)^215 ............... and so on

So total Amount = 200*(1.0043)^216 + 200*(1.0043)^215 + 200*(1.0043)^214 + 200*(1.0043)^213.......... 200*(1.0043)

Total amount = 71290

you can use excel also to solve this.

use fv() function in excel

pmt - 200

rate - 0.433%

pv - 0

time - 216

Put these value in fv() function, you will get the same answer

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