Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter9: Current Liabilities, Contingencies, And The Time Value Of Money
Section: Chapter Questions
Problem 9.12E
Related questions
Question
Identify whether the following statements about the simple and compound interest methods are true or false.
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Statement
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True
|
False
|
|
|---|---|---|---|
| Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest. |
|
|
|
| After the end of the second year and all other factors remaining equal, a |
|
|
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| All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. |
|
|
Heather is willing to invest $30,000 for six years, and is an economically rational investor. She has identified three investment alternatives (L, M, and P) that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment during the six-year investment period, complete the following table and indicate whether Heather should invest in each of the investments.
Note: When calculating each investment’s future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar.
|
Investment
|
Interest Rate and Method
|
Expected Future Value
|
Make this investment?
|
|---|---|---|---|
| L | 5% compound interest |
?
|
? |
| M | 4% simple interest |
?
|
? |
| P | 7% compound interest |
?
|
? |
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