How much represents interest earned on accumulated interest

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Reference no: EM131571605

1. If you deposit $10,000 into a retirement account earning 8% annually, how much total interest have you earned after 20 years, and how much of that represents interest on the original principal, and how much represents interest earned on accumulated interest? How much additional interest would you earn over the 10 year period if the interest rate were instead 10%?

2. You have just won the lottery. The prize is payable in one of two options. $200,000 now, or $280,000 in eight years. If you have the opportunity to invest at a 5% annual rate of interest, which of the two options would you prefer and why?

3. Your sister would like to borrow $8,000 right now to help her through her last year at college. She says she can easily pay you back $14,000 in twelve years after she has finally paid off the rest of her student debt. What annual rate of interest would you earn on this loan if you decide to do it? What else might affect your decision whether to lend to your sister?

4. You have saved a total of $7,000 in your wedding account. You expect the money in this account to earn 6.5% per year for the foreseeable future. How long would it take for the money to grow to the $12,000 that you think you will need for your dream wedding?

5. What would be the present value today of $10,000 received in 6 years if the interest rate is 6%. Repeat the calculation using a rate of 10%. Give an interpretation of the difference in the two answers.

Reference no: EM131571605

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