Practice Quiz

MTEL Business Practice Exam

Category - Business Operations

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Which of the following would most accurately calculate the maturity value (M) of a deposit of $5,000 earning 4% per year compounded semiannually for 2 years?
  1. M = $5,000 (1 + 0.02)2
  2. M = $5,000 (1 + 0.04)4
  3. M = $5,000 (1 + 0.02)4
  4. M = $5,000 (1 + 0.04)2
Explanation
Correct Response: C. To calculate the maturity value (M) of a deposit of $5,000 earning 4% per year compounded semiannually, the effective interest rate is 4%/2 years, or 2%/year. The deposit will be compounded twice a year, or 4 times total. Therefore, M = $5,000 (1 + 0.02)4. In response A the effective interest rate is correct, but it is only compounded 2 times. In response B the interest rate (0.04) is incorrect. In response D, the interest rate (0.04) and the number of times compounded (2) are incorrect.
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