1. The process for converting present values into future values is called ______ (compounding, discounting) . This process requires knowledge of the values of three of four time-value-of-money variables.

2. Which of the following is not one of these variables?

a. The inflation rate indicating the change in average prices

b. The duration of the investment (N)

c. The interest rate (I) that could be earned by invested funds

d. The present value (PV) of the amount invested

3. Investments and loans base their interest calculations on one of two possible methods: the _______ (simple, complex) interest and the _____ (uncomplicated, compound) interest methods.

4.

Compound interest?

FV = PV / (1 + I)NN

FV = (1 + I)NN / PV

FV = PV x (1 + I)NN

5.

Simple interest?

FV = PV / (PV x I x N)

FV = PV + (PV x I x N)

FV = PV - (PV x I x N)

6. All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest. (T/F?)

7. Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest. (T/F?)

8. All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. (T/F?)

Alek is willing to invest $30,000 for eight years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the eight-year investment period, complete the following table and indicate whether Alek should invest in each of the investments.

9.

Investment	Interest Rate and Method	Expected Future Value	Make this investment?
A	8% simple interest	$
B	3% compound interest	$
C	5% compound interest	$