Question

PLEASE HELP ME PLEASE

Reinvesting dividends allows you to:
buy more shares of your original investment
buy more shares of another company you are interested in
receive dividend checks
none of the above

If your money market account earns 12% interest each year, about how long would it take for your account to double?
12 years
72 years
6 years
9 years

If your friend is interested in investing in an interest bearing account, which method would you recommend to estimate how long it would take to double his money?
Savings calculator
Rule of 27
Rule of 72
Compound Interest calculator

If your parents are interested in saving for retirement, which method would you recommend so that they could figure out exactly how long it takes to double their money?
Compound Interest Calculator
Rule of 72
Rule of 27
None of the above

You want to invest in something that has a fixed interest rate. Which would you choose?
Stocks
Mutual funds
Bonds
None of the above

Answer 1

1. buy more shares of your original investment
2. 6 years
3. Rule of 72
4. Compound Interest Calculator
5. Bonds

Explanation:

1. "Reinvesting dividends" means the value of the dividend is used to purchase more of the stock that produces the dividends. That process buys more shares of the original investment.

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2 & 3. The "rule of 72" means the product of the interest percentage and the doubling time in years is approximately 72. For 12% interest, the doubling time can be estimated to be 72/12 = 6 years.

This rule is good for estimating when interest rates are above about 3 or 4 percent. (The attached graph shows the estimation error in years as a function of interest rate. Below 2%, doubling time is overestimated by more than a year.)

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4. For an exact result regarding any investment, a suitable calculator is required.

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5. Bonds, once purchased, generally have a fixed rate of return. The effective rate over the period of ownership may change if the bonds are sold.