Compound Interest Basics

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Questions and Answers

What is the primary purpose of compound interest?

To maintain the principal amount
To provide a fixed payment over time
To increase the principal amount periodically (correct)
To decrease the principal amount periodically

Compound interest is calculated only once at the end of the investment period.

False (B)

How long must Php10,000 be invested at a rate of 5% compounded monthly to reach Php10,511.62?

1 year

The formula for calculating the time in years for compound interest is __________.

t = n [ log(F ÷ P) ÷ log(1 + (r/n)) ] Signup and view all the answers

If a man invests Php 5,000 at 6% interest compounded quarterly, what will be the compounding periods in 3 years?

24 (D) Signup and view all the answers

What rate must be earned for an investment of Php 250,000 to yield Php 10,500 in 4 years and 9 months, compounded monthly?

2.04% Signup and view all the answers

Match the following types of interest compounding with their corresponding frequency:

Semi-Annually = Every 6 months Quarterly = Every 3 months Monthly = Every 1 month Annually = Every 12 months Signup and view all the answers

The compound amount after investing ₱7,500 at 3% compounded monthly for 3 years and 3 months will be __________.

₱8,122.37 Signup and view all the answers

What defines an annuity due?

Payments are made at the beginning of each payment interval. (D) Signup and view all the answers

A simple annuity has the same payment interval as the interest period.

True (A) Signup and view all the answers

Which type of annuity involves payments that extend over an indefinite length of time?

Contingent annuity Signup and view all the answers

Payments made at the end of each period characterize an __________ annuity.

ordinary Signup and view all the answers

What is the primary characteristic of a general annuity?

Payment intervals are not the same as the interest periods. (D) Signup and view all the answers

Match the following situations with the type of annuity:

Monthly rent payments are made at the beginning of each month = Annuity Due Company pays retirement contributions at the end of each period = Ordinary Annuity Depositing money at the beginning of every quarter = Annuity Due Insurance premiums paid at the start of each year = Annuity Due Signup and view all the answers

Provide an example of a situation where a payer makes payments by installment.

Paying for a car loan monthly. Signup and view all the answers

If a person saves $100 at the beginning of each month for a year at 5% compounded monthly, this scenario is best described as:

Annuity Due (B) Signup and view all the answers

Which formula represents the future value of an ordinary annuity?

$FV_{OA} = A \frac{(1+i)^n - 1}{i}$ (B) Signup and view all the answers

An annuity due has payments made at the beginning of each period.

True (A) Signup and view all the answers

What does 'A' stand for in annuity formulas?

Equal payments Signup and view all the answers

In a future value formula for a general annuity, the periodic interest rate is represented by __________.

p Signup and view all the answers

Match the following types of annuities with their characteristics:

Ordinary Annuity = Payments at the end of each period Annuity Due = Payments at the beginning of each period Simple Annuity = Fixed payments over a defined period General Annuity = Payments can vary over time Signup and view all the answers

Which of the following is a key characteristic of a simple annuity?

The payments are equal and fixed. (A) Signup and view all the answers

The present value of an annuity cannot be calculated if the interest rate is zero.

False (B) Signup and view all the answers

What is the significance of the variable 'n' in annuity formulas?

Number of compounding periods Signup and view all the answers

The formula for the future value of an annuity due is represented as __________.

$FV_{AD} = A \frac{(1+i)^n - 1}{i} (1+i)$ Signup and view all the answers

Which term refers to the value of a series of future cash payments discounted back to the present?

Present Value (C) Signup and view all the answers

What is the future value formula for an ordinary annuity?

$FV_{OA} = A rac{(1+i)^{n}-1}{i}$ (D) Signup and view all the answers

An annuity due pays at the end of each period.

False (B) Signup and view all the answers

What is the key difference in payment timing between ordinary annuity and annuity due?

Ordinary annuity pays at the end of each period, while annuity due pays at the beginning. Signup and view all the answers

The future value of a series of payments made at the end of each quarter for 4 years at an interest rate of 4.8% compounded quarterly can be calculated using the formula __________.

$FV_{OA} = A \frac{(1+i)^{n}-1}{i}$ Signup and view all the answers

Match the following annuities with their payment timing:

Ordinary Annuity = Payments at the end of each period Annuity Due = Payments at the beginning of each period General Annuity = Payments could be at any point in time Simple Annuity = Payments at regular intervals Signup and view all the answers

What would be the present value of a series of payments made at the beginning of each month for 2 years at an interest rate of 2% compounded monthly?

$PV_{AD} = A \frac{1-(1+i)^{-n}}{i}(1+i)$ (D) Signup and view all the answers

The present value of an annuity is always less than the future value of the same annuity.

True (A) Signup and view all the answers

What is the periodic rate if the annual interest rate is 4.8% compounded quarterly?

1.2% Signup and view all the answers

The number of compounding periods for a payment made quarterly for 4 years is __________.

16 Signup and view all the answers

The formula for calculating the future value of a general annuity due is given by:

$FV_{GAD} = A \frac{(1+i)^{n}-1}{p}(1+i)$ (D) Signup and view all the answers

Flashcards

Compound Interest

Interest calculated on the initial principal and also on the accumulated interest from previous periods.

Compounding Period

The frequency (e.g., annually, semi-annually, quarterly, monthly) at which interest is calculated and added to the principal.