(a) Suppose that you plan to buy a car for $8,000 in three years. Given a simple interest rate of 3% per annum on a savings account, how much capital do you need to invest today in order to buy the car in four years time? [5 marks]

(b) The first credit card that you get charges 11.4% interest to its customers and compounds that interest monthly. Within one day of getting your first credit card, you max out the credit limit by spending $1,000. If you do not buy anything else on the card and you do not make any payments, how much money would you owe the company after 6 months? [5 marks]

(c) An insurance company offers an ordinary annuity that earns 5.5% interest compounded annually. Mrs. Erna Smith plans to make equal annual deposits into this account for 30 years and then make 20 equal annual withdrawals of $ 28,000, reducing the balance of the account to zero.

(i) Compute the value of the fund based on the withdrawals required. [5 marks]

(ii) Compute the amount of each deposit needed in order to maintain the fund. [5 marks]

(iii) Compute the total interest earned over the entire 50 years. [5 marks]

Answer rating: 100% (QA)

a To buy a car for 8000 in four years time the capital that needs to be invested today is 7380 This can be calculated by using the formula Future Valu... View the full answer