Interest and Compound Interest

There are two types of interest problems on the GMAT, and they include simple interest and compound interest. Simple interest is the most basic and is a function of P, the principle amount of money invested, the interest rate earned on the principle, i, and the amount of time the money is invested, t (this is usually stated in periods, such as years or months). The resulting equation is:       I = iPt In basic terms, the above equation tells us the amount of interest that would be earned on a principle amount invested (P), for a given time (t) at a given interest rate (i). Example: If you invested $1,000 (P = your principle) for one year (t = one year) at 6% simple interest (i = given interest rate), you would get $60 in interest at the end of the year and would have a total of $1,060. For compound interest, you would earn slightly more. Let’s look at similar type problem, though this one involves compound interest. Mr. Riley deposits $500 into an account that pays 10% interest, compounded semiannually. How much money will be in Mr. Riley’s account at the end of one year? For compound interest, first you need to divide the interest rate by how many compound periods there are. So for in the above question, because we are compounding semiannually, we need to divide 10% by 2 (because of 2 compounding periods), and if we were compounding quarterly, we would need to divide 10% by 4. In the above question, Mr. Riley deposited $500 into his account at a rate of 10% compounded semiannually and the bank will divide his interest into two equal parts. They will pay 5% interest (10%/2) at the end of six months, and then will pay another 5% at the end of the year. Compound interest can essentially be translated into “interest paid on interest”, meaning that after one period, you are paid interest on the interest that was paid in prior periods, hence the phrase “compounding”. So at the end of the six months, Mr. Riley has $525 because the bank paid $25 in interest ($500*5%) into his account. For the second half of the year, Mr. Riley is then paid 5% on the $525 balance that was in his account at the end of the first six months. This interest is equal to $525*5% = $26.25. Therefore, at the end of the year, Mr. Riley has $551.25, which is equal to his balance of $500, plus the $25 interest paid at the end of 6 months, plus $26.25 paid at the end of the year. Mr. Riley earns $1.25 more with this compound interest than he would have been paid if he were paid only 10% simple interest (would have been only $550). The lesson? Compound interest always pays more! Let’s look at another similar type of problem that involves interest. Money invested at x%, compounded annually, triples in value in approximately every 112/x years. If $2500 is invested at a rate of 8%, compounded annually, what will be its approximate worth in 28 years? A. $3,750 B. $5,600 C. $8,100 D. $15,000 E. $22,500 At first glance, this one seems pretty tricky because you are given x% as the interest rate and it asks you about compounding and it might seem difficult where to find a starting point for this. For this one, it might be a bit easier to think about this without the use of compound interest, which might unnecessarily confuse you. Here, we are given x% as 8%, so all we need to do is take 112/8 = 14. Thus, we know that the money triples in value every 14 years. Further, we know that the money will triple exactly twice in 28 years, once in 14 years and one more time at the 28^th year. So first we need to multiply the original $2500 invested by 3 to get the balance at the end of year 14 (because it triples), to get $7,500 (or $2,500*3). Now, we know that this balance of $7,500 will triple again, so the final balance at the end of the next 14 year period will be $22,500 (or $7,500*3). The correct answer choice is E. Overall, the three types of interest problems you will most likely encounter come test day will be simple interest, compound interest, and word problems involving the mention of interest, but that can be solved without the application of interest or compound interest methods. The key to deciphering between compound interest and simple interest is to see how many periods the interest is paid….interest paid in one period is simple interest and interest “paid on interest” in multiple periods is compound interest. Finally, remember that some questions can be solved intuitively. Check out Grockit for more GMAT quantitative practice!

In part two of this series, we discussed the thrills of finding roommates and driving across country for relocation, the adventures and the excitement of orientation, as well as what to expect during the final two weeks before classes actually start. The journey continues… Orientation provides a great opportunity to get to know your future classmates outside of the classroom. Depending on the size of your incoming class, you may or may not be able to meet everyone, but regardless, it is a prime opportunity to go out and meet those people that you will see walking the halls of the grad school buildings. However, once orientation is over, there is a chance that you may hardly ever see those people that you met, but again, this depends on the size of your incoming class. It seems that most large MBA programs are similar in the set-up of class structure and curriculum. In general, most schools will divide the incoming class into sections and you will take the majority of your “core” classes (such as accounting, finance, marketing, statistics, etc.) with this same group of people. There are advantages and disadvantages to this set-up. The advantages include increased rapport among your classmates, better flow in lectures as the class becomes accustomed to student and instructor styles, and a great environment to really get to know your fellow classmates. The main disadvantage is that you don’t get to spend much time with other students in your program and you will probably notice that cliques begin to form. However, there are many other social activities that will provide you with opportunities to meet those students who are not in your section. There is a funny feeling of anticipation on campus the first day of class, as no one knows really what to expect. There are students who have been out of school for ten years or more mixed in with students who were in undergrad not too long ago, providing for an environment of anxiety, excitement, and “fear” of the unknown Additionally, no one knows what to expect from the professors and whether or not they will be as boring as hell or very powerful and effective leaders. No matter what, the first day of school is very exciting and a great experience. There is nothing to worry about, except for the fact that you will likely already have reading, homework, or assignments to get started on.  This is what we came back for school for in the first place, so don’t be surprised if you get more work than you expected. After all, you are paying top dollar for your education (you might be on someone else’s dime, but someone is paying) so you might as well take it all in and enjoy it! You will likely have four or five classes (and again depends on your school, whether they are on semesters or quarters) that meet twice per week. Odds are that you came back to school to switch careers and/or boost your resume to get a better job. Besides attending classes, doing homework, and socializing, you will probably be attending a lot of on-campus company presentations. There are many companies from all sorts of industries (management consulting, investment banking, marketing, investment management, etc) that come to many of the top MBA programs each fall to recruit for both full-time positions (for the second-year students) and for summer-internships. You career center will have a list of all the firms coming to campus and a schedule of when they will be presenting. If you want to be taken seriously in the recruiting process and in interviews, it is imperative to attend these events. They provide you with a wealth of information on the company and the industry, and employees from various levels come to share their experiences and discuss what types of projects you might be exposed to. It is extremely informative and beneficial and will help you decide if a company is your dream firm or some place that you do not want to work at. These presentations will enable you to meet recent grads from your school who you will be able to network with and build strong relationships that will no doubt serve you well further on down the interview process. If you network well, you can establish relationships with employees from your target companies that will lead to further interaction and encounters with them. Companies love people that are ambitious, informed and excited about the prospect of joining their company. Sometimes there are receptions following the presentations, complete with appetizers and beer and wine, which allow you to have more one-on-one conversations with firm employees. You will find that fall quarter is a very busy time with class, extra-curriculars, and recruiting. It is a lot to handle sometimes, but it is important that you take the time to do it right. This means doing well in classes, taking the effort to meet as many new friends as possible, and also putting your best foot forward in recruiting so that you can obtain a fantastic summer-internship. This article is the third in a series….please be on the lookout for the fourth piece, where we will discuss the summer-internship interview process, second semester, and other exciting thrills of your first year of an MBA program. It’ll be crazy fun, but watch out, the time flies by, soak it all in!!!! Soon you will be sitting at your desk during your summer internship wondering where the time went! Read other articles in this series: The Complete MBA Student Lifecycle, pt 1 The Complete MBA Student Lifecycle, pt 2

So what exactly happens within the day you determine to pursue MBA and that you are sick and tired of your meaningless job along with your mundane, boring routine of awakening up at 6am, showering, brushing (hopefully), commuting, checking countless, never-ending emails, then returning home to those idiotic tivo’d that exhibits you to think that it will make you laugh, but really not, only to make it happen again in 8 hours? Well, that is a very good question that my buddies and I will try to answer just exactly how your life will change and what you are able to expect…(deep breaths).

So, the lifecycle starts similar to this, err, well it’s really different for everybody. We have processed and finalized all our applications to the schools that any of us think we have a shot at (which by the way is so arbitrary because the admissions committees at all of the best schools are far too subjective for their own good; they’re can’t differentiate a grape and an elephant, or perhaps a turtle and a hare, a number of them just don’t obtain it. What I am saying is don’t be disappointed if you don’t get into one of your target schools, inspite of your “seamless” credentials, it is far more subjective than we will be able to realize). Now, that we have applied, we wait! While we wait, there are some things that we should remember that are fairly standard, no matter what school we end up going to….”is it a boy?!?”

First, there comes a point we must tell our bosses, supervisors and staff that we are leaving the company. Tears,yes, and much more tears, but that is reality. However you decide to cut the cord, it is respectful to give your company a proper heads up that you are leaving, a company that is paid that hard earned a salary. You owe it towards your company, and your superiors, to provide them ample period of time to interview and hire someone else to replace you. Honestly, it isn’t bad as it seems, and in fact, people are happy and glad for you that you are sane enough to realize and arrive to the decision that you don’t want to work with your company through out your days. Sure, you might not get the $100 Olive Garden gift certificate that you will probably receive for your 25 hard years of work, but don’t worry about it, once you leave business school, you’ll be sick of free lunches (and if you don’t realize this yet, you don’t belong in business school, as there is no such thing as free lunch!) You will be surprised how easy this day is and relieved you will feel whenever you tell everyone this news. Don’t fear the reaper, you might be replaceable after all, let’s get over this thought that we aren’t! The main point here, tell your boss and supervisor that you’re planning to go to a business school. Don’t burn bridges and don’t bite the hand that feeds you, even if it’s not for much longer.

Odds are, unless you are going to the Medieval State University School of Business, you will need a laptop for your next two years of higher education. Trust me, you will require it for all of the pictures, downloaded music, and surfing the web while sitting in a boring accounting class, if nothing else. Finances for a computer, and my advice is to network with your soon-to-be classmates (through class distribution lists, etc) to see if anyone has a discount with a regarded computer company (Dell or Lenovo are popular). Plan ahead, because you don’t want to arrive on campus, simply to hear that there was a problem together with your order that you placed 11 weeks ago. You will get behind immediately and you will be generally known as “that person without a computer, what a jerk, who doesn’t have a computer!?!” Also, sorry Mac lovers, Macs usually are not used in the business world, I would advise against getting a Mac.

Additionally, it is also a great time to start out thinking who you will be living in business school. If you have a significant other, then that is probably already decided, unless you want to be sleeping on the couch the night you have that conversation…and for the foreseeable future. It might be a good try to meet people out from your current city (if you reside in a big city, like NYC, Chicago, Los Angeles, San Francisco, etc) to know if you are suitable with anyone there that you’ll be going to school with. It is much easier to meet someone BEFORE you transfer in with them, the last thing you desire is an incompatible roommate, one which will be throwing beer cans against the wall at 5 in the morning, 6 nights a week. Some people might think this is an excellent thing, but we are now acquiring a “professional” degree, let’s not forget about that.

Many people may not realize that some MBA programs do take the GRE for admissions and that some doctoral programs take the GMAT for admissions. With this in mind, it is important to understand the key differences you will encounter with both of these tests. Be sure to check with your target schools well in advance to make sure you are taking and preparing for the right test. The last thing you want to do is learn that your top school only takes one test or the other. Further, please be to check www.mba.com and www.ets.org/gre for further details. Also, ETS, makers of the GRE, are planning a GRE overhaul to start in 2011, so keep this in mind.

The following is an overview of the overall structure of the GMAT test:

GMAT

The GMAT test consists of three main parts, the Analytical Writing Assessment (commonly referred to as AWA), the Quantitative section (commonly referred to as Quant), and the Verbal section (which many people just call Verbal). You have 3.5 hours for the entire exam, though there is a whole process of checking in, etc, that will make it longer than this. All three portions are taken at a testing center on a computer. Also, note that the GMAT is a Computer Adaptive Test (CAT) and adapts to your skill level based on your right or wrong answer choices. This implies that your test is unique, as you will receive different questions than another test taker.

Analytical Writing Assessment Section

The GMAT test begins with the AWA and consists of two separate writing portions and you are allowed 30 minutes for each essay. They are the “Analysis of an Argument” and “Analysis of an Issue”. These writing samples are fairly straightforward and there are many practice examples in the OG Guide or many other books.  Once you are finished with the AWA section, you are offered an optional 5 minute break. Many students use this break to use the restroom or just have a quick walkabout, etc.

Quantitative Section

This Quantitative section contains 37 multiple-choice questions of two different types of questions, Data Sufficiency (commonly referred to as DS) and Problem Solving (commonly referred to as PS, for all you lingo enthusiasts). You are allowed a maximum of 75 minutes to complete the entire section, which equates to about 2 minutes per question. The Data Sufficiency questions ask you a question, then show you two different pieces of information and you are supposed to analyze whether one, both, neither, or taken together they answer the question that you are given. There is a certain strategy to answer these types of questions, but this is not the purpose of this article (there are many articles and much information out there). Problem Solving questions involve a question and five answer choices, you are to choose the correct answer.

Verbal Section

After the Quantitative Section, you will be given another optional break, which again is useful for many people. The Verbal section contains 41 multiple choice questions of three question types—Reading Comprehension (RC), Critical Reasoning (CR), and Sentence Correction (SC). Reading Comprehension involves reading a short passage and responding to questions (usually several in a row) about the passage. Critical Reasoning questions are those that give you an argument or brief paragraph and you must answer a question on this short argument/paragraph. They are much shorter in comparison to Reading Comprehension and usually only involve one question. Sentence Correction questions give you five different similar sentences and you are to choose what the best choice is. You are given a maximum of 75 minutes to complete the entire section, though because it is a computer test, you do not have to wait if you finish early. Once you are finished with the test, you are given a choice to cancel your scores or to accept. If you accept (which is usually advisable) you are immediately given your numerical score pertaining to the Quantitative and Verbal Sections. You will usually receive an official score report and your AWA score in the mail a few weeks later.

GRE

The GRE can be taken in both written and computer form and depends on what country or area you live in. Computer based tests are CAT, while the paper based tests are calculated via a process called “score equating”. In general, the GRE, like the GMAT, has three main parts, including the Analytical Writing, Verbal Reasoning, and Quantitative Reasoning. Further, an unidentified unscored section may be included and may appear in any order after the Analytical Writing section. It is not counted as part of your score. The total testing time is three hours. For more details, please visit www.ets.org/gre.

Analytical Writing

The Analytical Writing section consists of two analytical writing pieces, including a 45-minute “Present Your Perspective on an Issue” essay and a 30-minute “Analyze an Argument” essay. These essays test whether you can clearly articulate complex ideas and also test your English language abilities, among other things.

Verbal Reasoning

After the Analytical Writing section, and if you do not have the unidentified, unscored section, you will arrive at the Verbal Reasoning part of the test, which measures reading comprehension and verbal and analogical reasoning skills in a multiple-choice format. There are 30 questions in 30 minutes. There are four types of questions in the Verbal Reasoning section of the GRE test

Reading Comprehension – Reading comprehension questions measure your ability to read with understanding, insight and discrimination and test your ability to analyze a written passage (several paragraphs usually) from several perspectives.

Sentence Completion – Sentence completion questions measure your ability to use a variety of cues to recognize the overall meaning of a sentence and analyze the relationships among the component parts of the sentence. You are given five answer choices of a word or sets of words that best complete a sentence.

Analogies – Analogy questions test your ability to recognize the relationship between two words in a given word pair and to recognize when two word pairs display parallel relationships.  To answer correctly, you must correctly identify the key relationship between the given pair and then select the answer containing those words most closely related to one another.

Antonyms – Antonym questions measure the strength of your vocabulary and ability to reason from a given concept to its opposite. You must choose the best word or phrase that means the opposite of the given word.

Quantitative Reasoning

The Quantitative Reasoning section of the GRE test measures your ability to understand basic concepts of arithmetic, algebra, geometry, data analysis and tests your overall quantitative abilities. You are given 45 minutes to complete 28 quantitative questions and there are three types of questions:

Quantitative Comparison - These questions test your ability to reason quickly and accurately compare two different quantities. You are to choose the answer that is bigger than the other.

Problem Solving – The format of these may vary, but can comprise of basic arithmetic, algebra or data quantitative concepts.

Data Interpretation – Some problem-solving questions involve data analysis. These usually occur in sets of two to five questions that share data in the form of tables or graphs and tests your ability to gather data and calculate information from the graphs.

If you’re deciding to take either the GMAT or the GRE check out Grockit!