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.