Problem Solving in Finance and Investments

ANNUAL INTEREST RATE  FV AT END OF YEAR 1   FV AT END OF YEAR 5

CHECKING ACCOUNT 0.00% 2,000.00 2,000.00

SAVINGS ACCOUNT 1.50% 2,030.00 2,154.57

CERTIFICATE OF DEPOSIT 5% 2,100.00 2,552.56

Certificate of Deposit.

I would choose to save my $ 2,000 in a Certificate of Deposit account because it has a better rate of return which translates to high yields on my investment. The fact that saving up into this account has no bank charges is a plus as well.

Besides that, I would be secure given that the CD(s) are federally insured, and the restrictions resonate with me since I dont need to dip into my funds for the next five years so its lack liquidity would not affect me.

Although theres a probability of the savings losing its purchasing power over time if the inflation rate outdoes the interest rates, the pros outweigh the cons.

3. Amount of money needed at the end of each period.

ANNUAL INTEREST RATE INTEREST COMPOUNDED FV AT THE END OF THE YEAR 5 FV AT THE END OF YEAR 10 FV AT THE END OF YEAR

2.00% Annually 11,040.81 12,189.94 18,113.62

2.00% Quarterly 11,048.96 12,207.94 18,193.97

8.00% Annually 14,693.73 21,589.25 100,626.57

8.00% Quarterly 14,859.47 22,080.40 107,651.63

4. Compounding interest rate amplifies the growth of the principle amount and maximizes the earning potential of the investment.

From the above calculations, its evident that the effect of compounding interest depends on the frequency. Take an example of the first scenario by the end of the 5th year: By compounding the interest rate annually, the amount is 11,040.81 is lower compared to when its compounded quarterly where it amounts to 11,048.96.5

5. An estimate of the monthly loan repayment and the accumulated interest over the life of the loan.

LOAN AMOUNT INTERST RATE TERM MONTHLY LOAN PAYMENT TOTAL AMOUNT OF INTEREST

$7,500 6% 5 Years 7500/2.673=2,805.83 2,805.83/12=233.82 (233.82*5*12)-7500= 6529.2

$10,000 6% 5 Years 10000/2.673=3,741.11 3,741.11/12=311.76 (311.76*5*12)-10000= 8705.6

$15,000 6% 5Years 15000/2.673=5,611.67 5,611.67/12=467.63 (467.63*5*12)-15000= 13057.8

6. $ 7500 loan over a period of 3 years.

Rationale.

The repayment period is short with a small monthly repayment and a low-interest amount being accrued over the repayment period.

7. Opportunity cost

Its the value of the sacrifice of giving up something to acquire something else.

In this case, its the value of the total interest return on the $7500 savings in the money market that I will forego as a result of spending the money as half of the amount required to purchase a much-needed car for the commute to school.

8. Difference between taxable income and adjustable gross income.

Both terms are labels of income of an individual or entity used to facilitate calculation of income tax to be levied.

Taxable income is the amount of income money eligible to taxation after subtracting all the expenses and deductions allowable.

The adjusted gross income it is amount looked at when computing income tax which is the total income of any individual less some specific items.

Therefore, adjusted gross income is always more than the taxable income and to calculate income tax, and you must first calculate the adjusted gross income.

In conclusion: the adjusted gross income is the income that is taken as standard and allowable adjustments are made to arrive at the taxable income.

9. Definitions

Tax deductions

Its a fixed amount or a percentage allowable deduction on the income of an individuals adjusted gross income to arrive at the taxable income.

It, therefore, reduces the tax liability.

Tax exemption

Its the process of freeing items of tax. The tax authority allows some items to be excluded from any tax calculation especially if they are to charity or public service.

Tax credit

Its an amount of money subtracted from the tax that is already owed to the government.