Simple and Compound Interest Quiz
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Questions and Answers

What does the term 'principal' refer to in the context of simple interest?

  • The repayment date of the loan
  • The amount of money borrowed or invested on the origin date (correct)
  • The annual rate charged by the lender
  • The total interest earned on an investment

    • In the simple interest formula, what does 'rt' represent?

  • The total amount repaid by the borrower
  • The difference between future value and principal
  • The total interest paid over the loan period
  • The product of the rate and the term in years (correct)

    • Which formula would you use to calculate the future value of an investment using simple interest?

  • F = P(1 + rt) (correct)
  • F = P/(1 + rt)
  • F = P + Prt
  • F = Prt^2

    • What characterizes a simple annuity?

    <p>The payment interval is the same as the interest period (D)</p> Signup and view all the answers

    What is the primary difference between a simple annuity and a general annuity?

    <p>Simple annuities have the same length for payment and interest periods (A)</p> Signup and view all the answers

    Which statement correctly describes 'm' in the context of compound interest?

    <p>The number of conversion periods per year (A)</p> Signup and view all the answers

    What does the formula Ic = F - P calculate in terms of finance?

    <p>The compound interest earned on an investment (A)</p> Signup and view all the answers

    Which option describes the term 'm' in compound interest calculations?

    <p>Conversion period frequency per year (A)</p> Signup and view all the answers

    What term describes the sum of the present values of all payments in an annuity?

    <p>Present Value of an Annuity (C)</p> Signup and view all the answers

    Which of the following is an example of an annuity?

    <p>Monthly payment for car loan (C)</p> Signup and view all the answers

    What does the formula for the Present Value of a simple annuity require?

    <p>Regular payment amount, interest rate, and number of payments (C)</p> Signup and view all the answers

    Which of the following describes a deferred annuity?

    <p>Series of payments beginning at a later date (D)</p> Signup and view all the answers

    What does the Cash Value (CV) of an annuity represent?

    <p>The down payment plus present value of installment payments (D)</p> Signup and view all the answers

    Which statement correctly contrasts ordinary annuities and annuity due?

    <p>Annuity due payments are made at the beginning of each payment interval. (A)</p> Signup and view all the answers

    Which of the following accurately defines Fair Market Value?

    <p>The amount equivalent to the payment stream's value at a certain date (C)</p> Signup and view all the answers

    In the formula for the Future Value of a simple annuity, what variables are involved?

    <p>Regular payment amount, interest rate, and compounding interval (C)</p> Signup and view all the answers

    What does the period of deferral in an annuity represent?

    <p>The time between the annuity purchase and the start of payments (C)</p> Signup and view all the answers

    What is the primary difference between stocks and bonds?

    <p>Stocks are equity financing while bonds are debt financing (C)</p> Signup and view all the answers

    What is implied by investing in stocks regarding risk and return?

    <p>Higher risk with a chance for higher returns (B)</p> Signup and view all the answers

    What does the present value (P) of a deferred annuity account for?

    <p>The timing of payments and interest rate (B)</p> Signup and view all the answers

    What guarantees bondholders compared to stock investors?

    <p>Guaranteed interest payments and return of principal at maturity (A)</p> Signup and view all the answers

    Which of the following is true about preferred stocks?

    <p>Preferred stocks have a priority claim on dividends (D)</p> Signup and view all the answers

    What characterizes the investment risk associated with bonds?

    <p>Bonds have fixed interest rates that mitigate risk (B)</p> Signup and view all the answers

    What is a consequence of a company going bankrupt for stock investors?

    <p>They may lose part or all of their investment (D)</p> Signup and view all the answers

    What does the term 'dividend per share' refer to?

    <p>The share of dividends allocated for each shareholder (A)</p> Signup and view all the answers

    What is the primary purpose of a coupon in bond investment?

    <p>To provide periodic interest payments to the bondholder (A)</p> Signup and view all the answers

    Which statement accurately describes the 'fair price of a bond'?

    <p>The present value of all cash inflows to the bondholder (A)</p> Signup and view all the answers

    What does the term 'par value' or 'face value' mean in the context of bonds?

    <p>The amount payable on the maturity date (B)</p> Signup and view all the answers

    Which option best describes a 'stock market index'?

    <p>A measurement of value of selected stocks within the market (B)</p> Signup and view all the answers

    What is the significance of the coupon rate in bond investments?

    <p>It represents the rate earned per coupon payment (D)</p> Signup and view all the answers

    Which option best describes the role of 'collateral' in loan agreements?

    <p>It serves as financial backing for the lender (B)</p> Signup and view all the answers

    Why might investments with higher returns be more appropriate for long-term investors?

    <p>They can endure market fluctuations better over time (D)</p> Signup and view all the answers

    What is the term used for the total time allowed to pay off a loan?

    <p>Term of the Loan (B)</p> Signup and view all the answers

    Which method involves making equal payments on both principal and interest over time?

    <p>Amortization Method (A)</p> Signup and view all the answers

    What is a mortgage on movable property specifically called?

    <p>Chattel Mortgage (A)</p> Signup and view all the answers

    Which of the following correctly symbolizes a conjunction in logical propositions?

    <p>p ∧ q (B)</p> Signup and view all the answers

    What does the biconditional statement 'p if and only if q' signify?

    <p>p and q are both true or both false (C)</p> Signup and view all the answers

    Which logical connective is used to negate a proposition?

    <p>Not (C)</p> Signup and view all the answers

    In the context of collateral, what is required to secure a mortgage loan?

    <p>Real estate or other investments (B)</p> Signup and view all the answers

    What is termed as the remaining debt at a specified time in a loan agreement?

    <p>Outstanding Balance (A)</p> Signup and view all the answers

    Study Notes

    Simple Interest (Is)

    • Interest calculated on the principal, remaining constant
    • Lender/creditor: Person or institution investing money
    • Borrower/debtor: Person or institution borrowing money
    • Origin/loan date: Date money is received by borrower
    • Repayment/maturity date: Date loan is repaid
    • Time/term (t): Time in years borrowed/invested
    • Principal (P): Amount borrowed/invested initially
    • Rate (r): Annual interest rate (usually %)
    • Interest (I): Amount paid/earned for use of money
    • Maturity value/future value (F): Amount lender receives at maturity
    • Simple Interest Formula: Is = Prt or F = P + Is or F = P(1 + rt)
    • Compound Interest (Ic): Calculated on principal & accumulated past interest

    Compound Interest Formula

    • Ic = F - P
    • Ic = P[(1 + i)n - 1]
    • F = P(1 + i)n

    Present Value

    • P = F(1 + i)-n

    Annuities

    • Sequence of payments made at fixed intervals
    • Simple Annuity: Payment interval same as interest period
    • General Annuity: Payment interval different from interest period
    • Annuity Payment (R): Fixed payment for each period
    • Payment Interval: Time between successive payments
    • Future Value of Annuity (F): Sum of future values of all payments
    • Present Value of Annuity (P): Sum of present values of all payments

    Future and Present Values of a General Annuity

    • Present Value (P): P = R[1 - (1 + i)-n] / i
    • Future Value (F): F = R[(1 + i)n - 1] / i

    Cash Value or Cash Price (CV)

    • Equal to down payment + present value of installment payments

    Time Diagram

    • Ordinary Annuity: Payments made at end of payment intervals
    • Annuity Due: Payments made at beginning of payment intervals

    Deferred Annuity

    • Series of payments starting at a later date.

    Definitions of Proposition

    • Declarative sentence that is either true or false, but not both

    Simple Proposition

    • Conveys one thought, no connective words

    Compound Proposition

    • Contains two or more simple propositions, using connective words

    Basic Logical Connectives

    • Conjunction (∧): "p and q" written as p ∧ q
    • Disjunction (∨): "p or q" written as p ∨ q
    • Conditional (→): "if p then q" written as p → q or p → q
    • Biconditional (↔): "p if and only if q" written as p ↔ q
    • Negation (~): "not p" written as ~p

    Additional Concepts

    • Mortgage: Loan secured by collateral
    • Chattel Mortgage: Mortgage on movable property
    • Collateral: Assets securing a loan
    • Outstanding Balance: Remaining debt
    • Stocks: Share of ownership
    • Bonds: Debt security promising payment
    • Coupon: Periodic interest payment for bonds
    • Par Value/Face Value: Amount payable at bond maturity

    Stock and Bond Definitions

    • Par Value: Per-share amount stated on company certificate
    • Stock Index/Stock Market Index: Measures value of a stock market segment
    • Business loan: Money specifically for business
    • Consumer loan: Money for personal/family purposes
    • Collateral: Assets securing a loan (real estate, investments, etc.)
    • Amortization Method: Procedure for paying loan principal and interest

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    Simple Interest & Compound Interest PDF

    Description

    Test your knowledge on simple and compound interest concepts, including key terms like principal, interest rate, and maturity value. This quiz will challenge you on formulas and the differences between simple and compound interest calculations.

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