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Module 2 Problems

1) $546.39 2) $500.00 3) $331,315.11 4) $1,407.84 5) $4,178,631.90

Module 2 Questions 1) The earning of interest on interest is called compounding. Money that is deposited in savings accounts is frequently referred to as being compounded, for interest is earned on both the principal and the previously earned interest.

2) Discounting is basically the process of determining the difference between face value (or future value) and the present value of a payment. Present value is determined by dividing the future value by the interest factor. Discounting just reverses this equation.

3) A lum sum is the process of taking a single payment made at a particular time, as opposed to a number of smaller payments or installments. An annuity on the other hand is the opposite; it’s the process of taking a fixed sum of money paid to you each year, typically for the rest of their life (usually).

4) An annuity due is a series of equal annual payments with the payments made at the beginning of the year. An ordinary annuity is the opposite; it’s a series of equal annual payments in which the payments are made at the end of each year.

5) The words interest and compounded are frequently used together. For example, banks may advertise that interest is compounded daily for savings accounts, or the cost of a loan may be expressed as 8% compounded quarterly. In many cases, interest is not compounded annually but quarterly, semiannually, or even daily. The more frequently it is compounded (the more frequently the interest is added to the principal), the more rapidly the interest is put to work to earn even more interest. So if interest is earned daily over monthly, your total interest at the end of the year is going to be…...

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