Thursday, June 18, 2015

Finance Quiz Answers

1)    To obtain the exact amount of money left in the account after five years (though the question doesn’t really require this) we can use the compounding formula:

A = P(1 + r/ n) nt

Where A is the amount after the time, t,  r is the interest rate (2% or 0.02), P is the principal ($100) and n is the number of compounding periods per year, in this case n = 1). Then:

A = 100 (1 + 0.02/ 1) 5

A =  $ 110.41  (to nearest cent)

 So the answer is (A)

2)      The same formula as above can be used to find the amount A  after 1 year  (n=1, t = 1)with r = 0.01 but inflation = 2 % ( 0.02) so the effective interest rate becomes: r = [0.01 - 0.02] =  - 0.01 and: A = $99. So Ans. (C) “Less than today

3)     A stock mutual fund is composed of a bundle of different stock offerings hence provides automatic diversification. A company’s single stock does not so any loss in that single company stock is not compensated for by a gain in other stocks – adding up to an absolute loss. Thus in general it is better to own   stock mutual fund than a single company stock. Ans. False.

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