Question

Section B: Analyze and solve the following questions.

1-Sara and Lama are working in the same company and having the same salary SAR 15,000. Lama has borrowed SAR 10,000 from AL Rajhi Bank one year ago and has to pay it back in a monthly basis.

A broker called Sara and told her that there is a great investment opportunity where Sara can invest her money and gain 3.4% monthly interest. Sara told her friend Lama about the investment opportunity and they’ve decided to invest the coming salary SAR 15,000 for 24 months. However, Lama needs the interest received from the investment to pay back her loan from the bank each month. But Sara will not withdraw any amount from her investment account until the 24 months end.

A) How much is the total profit received by Sara, and the total profit for Lama? (2 points )

B) Explain why there is a difference between the profits if so. (2 points

A) How much is the total profit received by Sara, and the total profit for Lama? (2 points )

B) Explain why there is a difference between the profits if so. (2 points

How much is the total profit received by Sara, and the total profit for Lama?

Explain why there is a difference between the profits if so.

Answer 1

Sara will not withdraw the Interest earned every month. Thus, there will be interest on Interest.

FV of 15,000 SAR invested for 24 months at 3.4% interest per month works out to :-

FV = P * (1 + R ) ^n

FV = 15000 * (1 + 3.4% ) ^ 24

= 33,464.5 SAR

Thus, Total profit received = 33464.5 - 15000 = 18,464.5 SAR

Lama on the other hand will withdraw her monthly interest earned and use it to pay back her loan. Thus, she will earn fixed monthly interest on 15,000 SAR invested

Interest earned per month = 15000 * 3.4% = 510 SAR

Interest earned for 24 months = 24 * 510 = 12,240 SAR

There is a difference in profits of Sara and Lama due to interest on interest.