Question

Assume that 5 years from now you will need RM2000. Your bank compounds interest at a 6% annual rate.

b. If you want to make equal payments at the end of Years 1 through 5 to accumulate the RM2,000, how large must each of the 5 payments be?

c. If your father were to offer either to make the payments calculated in part (b) or to give you a lump sum of RM1,050 one year from now, which would you chose?

d. If you have only RM1,050 at the end of Year 1, what interest rate, compounded annually, would you have to earn to have the necessay RM2,000 at Year 5?  

e. Suppose you can deposit only RM268.76 each at the end of Years 1 through 5, but you still need RM2,000 at the end of Year 5. What interest rate, with annual compounding, is required to achieve your goal?

f. To help you reach your RM2,000 goal, your father offers to give you RM800 one year from now. You will get a part-time job and make 8 additional deposits of equal amounts each 6 months thereafter. If all this money is deposited in a bank that pays 10%, compounded semiannually, how large must each of the 8 deposits be?

g. What is the effective annual rate being paid by the bank in part ?

Answer 1