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Chapter Review

Investments—Which Type Is Right for You?

In this chapter, you learned that there are other ways to invest your money than in a bank savings account. The potential for a higher rate of return on your money is much greater, but there are risks to consider before you invest your money. Which investment is right for you? How much more interest does one investment earn for you annually than another?

  • 1.

    You can invest $5,000 in a regular savings account that earns 4 percent interest compounded quarterly or in a 1-year CD that earns 6 percent interest compounded quarterly. Based on 1 year of interest, which is the better investment?

  • 2.

    You can invest $5,000 in a 1-year CD or a 4-year CD, both earning an interest rate of 6 percent. Based on interest alone, which is the better investment? How much more interest does it earn you?

  • 3.

    What is the effective annual yield, rounded to the nearest thousandth percent, of each of the CDs in Problem 2?

  • 4.

    You can invest in either the 1-year CD or the 4-Year CD in Problem 2, but you know you are going to need your money in 2 years to purchase a new car. There is a large penalty for early withdrawal. Which is the better investment for you?

  • 5.

    You buy 50 shares of company stock at $99 per share. There is a $50 broker’s fee. The company pays an annual dividend of $1.50 per share. What is the annual yield to the nearest thousandth percent?

6. You sell those same 50 shares of stock for $105 per share. The transaction involves a broker’s commission of $0.03 per share. What is your profit or loss?

7 . Y o u i n v e s t y o u r $ 5 , 0 0 0 i n a 1 0 - y e a r b o n d a t t h e q u o t e d r a t e o f 9 6 1 _ 2 . T h e b o n d p a y s a n i n t e r e s t rate of 6 percent. What is the annual interest? What is the annual yield, rounded to the nearest hundredth percent?


Chapter 12 Review

Study Guide

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