Practice #2 Detailed Solutions

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 Item 1: One year ago, which type of investment had the highest interest rate? Which type had the lowest savings rate? return to top

This question is in two parts. The first asks for the investment with the highest rate one year ago; the second asks for the investment with the lowest rate one year ago. For both of these questions we need to only focus on two columns: the Yr. ago and Type of Investment columns.

The highest interest rate:

• The highest interest rate one year ago was 5.53%, in row 5.
• the Type of Investment in row 5 is the 5-yr. CD.
• Therefore, the 5-yr. CD had the highest interest rate one year ago.

The lowest interest rate:

• The lowest interest rate one year ago was 2.60%, in row 2.
• The Type of Investment in row 2 is the Bank Money Market.
• Therefore, the Bank Money Market had the lowest interest rate one year ago.

Rates for Interest Earned
Type of Investment Year Ago
row 1 Money Mutual Funds 4.82%
row 2 Bank Money Market 2.60%
row 3 6 mo. CDs 4.76%
row 4 1 yr. CDs 5.04%
row 5 5 yr. CDs 5.53%

 Item 2: What type of investment had an interest rate of 5.00%? How long ago did it have this interest rate? return to top

We need to scan through all cells of the table to seek out a specific data entry of 5.00%.

We find one cell with an interest rate of 5.00%. Determine the row it is in and the investment type for that row. The row, is labeled Money Mutual Funds. So, an interest rate of 5.00% occurred for Money Mutual Funds.

Type of Investment Present 6 mos. Ago Year Ago
Money Mutual Funds 5.07% 5.0% 4.82%

We then look at the label of the column for this cell, the second column. This column corresponds to 6 mos. ago. So, an interest rate of 5.00% occurred 6 months ago in Money Mutual Funds.

 Item 3: Which types of investments have had interest rates drop from one year ago to the present day? return to top

Here we want to focus on three columns: the Type of Investment column, Present column, and Yr. ago column. Then we must compare the data entries in the last column, Yr. ago, with data in the second column, Present.

Comparing interest rates between the Present to a Yr. ago for each of the five types of investments, we scan down the two columns and determine which investments types have lower interest rates in the present than one year ago. Below, for each row, we put a > (greater than) or < (less than) symbol between the two columns.

Type of Investment Present Year Ago
Money Mutual Funds 5.07% > 4.82%
row 2 Bank Money Market 2.52% < 2.60%
6 mo. CD 4.81% > 4.76%
1 yr. CD 5.09% > 5.04%
row 5 5 yr. CD 5.42% < 5.53%

Notice that only the second and the fifth rows, corresponding to Bank Money Markets and 5-Yr. CDs, have lower savings rates in the present than one year ago. This means that in those two types of investments there has been a drop in the savings rate from one year ago to the present day.

So, Bank Money Market and the 5-yr. CD's have had their interest rates drop from one year ago to the present day.

The investment that would give us the largest return is the one with the largest interest earned rate. To determine this, we can scan the table to see which type of investment has the highest rates over time.
After scanning the table, we can see that the 5-yr. CD has the highest interest earned rate for one year ago, 6 months ago, and the present. Since the 5-yr. CD is the highest in all three of these times, it is clearly the one that would have given us the highest return on our investment.
Type of Investment Present 6 mos. ago 1 yr. ago
Money Mutual Funds 5.07% 5.0% 4.82%
Bank Money Market 2.53% 2.61% 2.60%
6 month CDs 4.81% 4.9% 4.76%
1 year CDs 5.09% 5.2% 5.04%
5 year CDs 5.42% 5.74% 5.53%

IMPORTANT: If you feel comfortable with the material in this unit, move on to the next unit. If you feel you need more review than has been offered by this book, you should contact your professor for where to find help.