engineering economy Practice exam

# engineering economy Practice exam - Chapter 4 More Interest...

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Chapter 4 More Interest Formulas - Results You answered 8 out of 23 questions correctly, for a score of 34.783%. 1. Correct. You answered: c. \$2,307. If \$175 is deposited at the end of each year in a savings account that pays 6% interest per year, approximately how much money will be in the account at the end of 10 years? The correct answer was: c. \$2,307. \$2,307 References: Solution F = A(F/A, i, n) = 175(F/A, 6%, 10) = 175(13.181) = \$2,306.68 2. Correct. You answered: a. Greater than. Your annual credit card interest rate is 8%. If monthly compounding is used in lieu of annual compounding, the effective interest rate is _______ the nominal interest rate. The correct answer was: a. Greater than. Greater than References: Solution: The answer is (a), greater than. The annual nominal interest does not take into account the compounding of interest that occurs throughout the year while the effective interest rate takes the compounding into account. The more we compound in a given time period, the greater the interest rate. 3. Incorrect. You answered: c. 80%. A local pawnshop buys your TV set for \$200 and resells it back to you for \$250 a month later. What nominal interest rate is implied in this arrangement? The correct answer was: d. 300%. 300% References: Solution: Interest = \$50 in one month i = 50/200 = 25% r = im = 25(12) = 300% 4. Correct. You answered: c. 10.28%. What nominal interest rate, compounded monthly, is equivalent to a 10.78% effective rate? The correct answer was: c. 10.28%. 10.28%

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References: Solution: i e = [1 + (r/n)] n − 1 0.1078 = [1 + (r/12)] 12 − 1 1 + r/12 = 1.1078 1/12 = 1.008567834 r = 0.1028 or 10.28% 5. Correct. You answered: d. 16.18% . Your new credit card has a 15% nominal interest rate which is compounded daily. This is equivalent to an effective annual interest rate of about The correct answer was: d. 16.18% . 16.18% References: Solution: i e = (1 + r/m) m −1 = (1 + 0.15/365) 365 − 1 = 16.18% 6. Incorrect. You answered: c. 15.00% . You open a credit card account that charges 1.25% interest each month on the unpaid balance. What is the effective annual interest rate? The correct answer was: d. 16.08%. 16.08% References: Solution: We are given a 1.25% effective interest rate per month. So, i = 0.0125 Using i = (1 + i ) m − 1 where i a is the effective interest rate per year and m is the number of compounding periods in a year, we obtain: i a = (1 + 0.0125) 12 − 1 = 16.08% effective annual interest 7. Correct. You answered: c. 21%. Your credit card charges you 1.75% interest per month on your account balance. This is equivalent to a nominal annual interest rate of The correct answer was: c. 21%. 21% References: Solution: The nominal interest rate is the annual interest rate that does not take into account the effect monthly compounding. Nominal interest rate = 1.75% x 12 = 21% 8. Correct. You answered: b. 19.51%. The effective interest rate on a loan is 21.35%. If there are 12 compounding
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engineering economy Practice exam - Chapter 4 More Interest...

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