a) Justin borrowed money from a bank to finance a small fishing boat. The bank's term allowed
Question:
a) Justin borrowed money from a bank to finance a small fishing boat. The bank's term allowed him to defer payments (including interest) on the loan for six months and to make 36 equal end-of-month payments thereafter. The original loan was $4,800, with an interest rate of 24% p.a. compounded monthly. After 16 monthly payments, Justin found himself in a financial bind and went to a loan company for assistance in lowering his monthly payments. Fortunately, the loan company offered to pay his debts in one lump sum if he would pay the company $115.12 per month for the next 36 months. What monthly interest rate is the loan company charging on this transaction? (10 marks)
b) Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow. (5 marks)
c) Snow Corporation wishes to accumulate funds to provide a retirement annuity for its Vice President of Research, Ms White. Ms White by contract will retire at the end of exactly 12 years. On retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12-year 'accumulation period', Snow Corporation wishes to fund the annuity by making equal annual endof-year deposits into an account earning 9 percent interest. Once the 20-year 'distribution period' begins, Snow Corporation plans to move the accumulated monies into an account earning a guaranteed 12 percent per year. At the end of the distribution period the account balance will equal zero. Note that the first deposit will be made at the end of year 1 and the first distribution payment will be received at the end of year 13.
i) How large must Snow Corporation's equal annual end-of-year deposits into the account be over the 12-year accumulation period to fund fully Ms White's retirement annuity? (5 marks)
ii) How much would Snow Corporation have to deposit annually during the accumulation period if Ms White's retirement annuity was perpetuity and all other terms were the same as initially described? (5 marks)