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Tutorial 3

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4 views

Tutorial 3

Uploaded by

mile4chan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

A 3-year university course, after government subsidy will cost her $5,000
a year paying at the beginning of each academic year. Given that the
current interest rate is 7% p.a., how much money does sam have to
deposit in the savings account today?
- Present Value
- Annuity Due problem
- PV of an annuity due:

Sam needs to deposit approximately $14,040.09


2. Lucas borrows $200,000 from a bank. He agrees to pay a fixed interest
rate of 18.48% per annum (calculated monthly) and to repay by equal
monthly installments over 10 years. Calculate the monthly repayment by
how much does Lucas’ first repayment reduces the principal? If the loan is
paid off as planned, by how much will the last repayment reduce the
principal?
- Calculate the monthly repayment of an amortizing loan:

- Calculate the reduction in principal for the First and Last Repayment:
a. First Repayment: after alculating the monthly repayment M, we will
find the interest portion of the first payment, which is P x r. the
reduction in principal for the first payment will be M - interest
portion.
b. Last Repayment reduction: the reduction in principal will be equal to
the monthly repayment since there is no remaining interest to be
paid.

3. A retail chain operates its own credit provision system for customers.
Company policy is to set a nominal annual interest rate, and to charge
interest monthly. To cover its costs and make a return on capital, the
company has a target effective interest rate of 19.5% per annum. What
nominal annual interest rate should it set?
John decides that he desperately needs a new Italian suit priced at
$1,999. He borrows the money and agrees to pay $71.07 each month
at an interest rate of 16.8 per cent per annum, payable monthly. For
how long will he be making repayments?
4. Jay is 30 years old and will retire at age 65. He will receive retirement
benefits but the benefits are not going to be enough to make a
comfortable retirement life for him. Jay has estimated that an additional
$25 000 a year over his retirement benefits will allow him to have a
satisfactory life. How much should Jay deposit today in an account paying
6 per cent interest to meet this goal? Assume Jay will have 15 years of
retirement.
5. Jim borrowed $500,000 to purchase a house. The loan requires monthly
repayments over 15 years. When he borrowed the money the interest rate
was 13.5 per cent per annum, but 18 months later the bank increased the
interest rate to 15.0 per cent per annum, in line with the market rates. The
bank tells Jim he can increase his monthly repayment (so as to pay off the
loan by the originally agreed date) or he can extend the term of the loan
(and keep making the same monthly repayment).

Calculate: (a) The new monthly repayment if Jim accepts the first option.
a. Calculate the original monthly payment
b. Determine the remaining balance after 18 months

c. Calculate the new monthly payment with the increased interest


rate:
(b) The extra period added to the loan term if Jim accepts the second
option.
d. Determine the remaining loan balance

e. Find the extended term with the new interest rate:


f. Calculate the extra period

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