Trine University MGT 413 Part 2 1)Compounding interest means the following: Two different interest rates are used for the same loan

Trine University

MGT 413

Part 2

1)Compounding interest means the following:

1. 1. Two different interest rates are used for the same loan.
   2. The interest rate is determined by the borrower, not the lender.
   3. Dividing the interest into components.
   4. Interest is earned not only on the initial balance, but also on previously received interest payments.

2. Assume you deposit $100 in an account at 10% interest rate and leave it in the account for three years. In year 3, the interest on previously received interest component will be equal to

a. $1.00.

b. $21.00.

c.     $2.10.

d.   $0.21.

3. Assume $400 to be received in year 4 has a present value equal to $350. If we keep the same interest rate assumption, but instead assume that the $400 is received in year 5 we know that the resulting present value must be
   1. Larger than $400.
   2. Larger than $350.
   3. Smaller than $350.
   4. Equal to $350.