Question 1

An investor's portfolio increased in value by 53% over a five-year period while the Consumer Price Index rose from 121.6 to 135.3. What was the portfolio's annually compounded real rate of return?

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Question 2

If an interest rate of 6.9% compounded semiannually is charged on a car loan, what effective rate of interest should be disclosed to the borrower?

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Question 3

What monthly compounded nominal rate would put you in the same financial position as 5.5% compounded semiannually?

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Question 4

What is the time remaining until the maturity date of a $50,000 strip bond if it has just been purchased for $20,822.89 to yield 5.38% compounded semiannually until maturity?

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Question 5

The current (simple annualized) yield, based on the holding-period return for the most recent seven days, is reported for a money market mutual fund as 4.54%. What is the fund's corresponding effective (annualized) yield?

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Question 6

The Consumer Price Index rose from 131.2 to 132.1 during the second quarter of a year. What was the effective annualized rate of inflation during the quarter?

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Question 7

A bank offers a rate of 5.3% compounded semiannually on its four-year GICs. What monthly and annually compounded rates should it quote in order to have the same effective interest rate at all three nominal rates?

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Question 8

A $10,000 investment grew to $12,000 after 39 months of semiannual compounding. What effective rate of return did the investment earn?

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Question 9

The Calgary Real Estate Board reports that house prices increased by 5% during the first seven months of the year. If prices continue to rise at the same rate for the subsequent five months, what will be the (compound) increase for the entire year?

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Question 10

Camille can obtain a residential mortgage loan from a bank at 8.75% compounded semiannually or from an independent mortgage broker at 8.6% compounded monthly. Which source should she pick if other terms and conditions of the loan are the same? Present calculations that support your answer.

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Question 11

When discounted to yield 9.5% compounded quarterly, a $4500 four-year promissory note bearing interest at 11.5% compounded semiannually was priced at $5697.84. How long after the issue date did the discounting take place?

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Question 12

The current (simple annualized) yield on a money market mutual fund, based on the return for the most recent seven days, is 4.12%. What effective (annualized) yield will be reported for the fund?

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Question 13

If a $15,000 investment grew to $21,805 in 4½ years of quarterly compounding, what effective rate of return was the investment earning?

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Question 14

Which of the following rates would you prefer for a loan: 7.6% compounded quarterly, 7.5% compounded monthly, or 7.7% compounded semiannually?

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Question 15

Rounded to the nearest month, how long will it take money to lose one-third of its purchasing power if the annual inflation rate is 3%?

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Question 16

You are offered a loan at a rate of 9% compounded monthly. What would a semiannually compounded nominal rate would a competing bank need to offer in order to provide an equivalent rate?

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Question 17

The population of a mining town declined from 17,500 to 14,500 in a five-year period. If the population continues to decrease at the same compound annual rate, how long, to the nearest month, will it take for the population to drop by another 3,000?

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Question 18

If an invoice indicates that interest at the rate of 1.2% per month will be charged on overdue amounts, what effective rate of interest will be charged?

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Question 19

A T-bill with 125 days remaining to maturity is discounted to yield 4.6% pa simple interest. What is the effective annualized rate of return on the T-bill?

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Question 20

A trust company pays 5.375% compounded annually on its 5-year GICs. What semiannually compounded nominal interest rate would provide the same maturity value?

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Quiz 9: Compound Interest: Further Topics and Applications