Part B Long Answer Questions (40 marks)

Question 1 (10 marks)

You are a young personal financial adviser. Diana, one of your clients approached you for consultation about her personal financial plans to get $50,000 for a European 1-month holiday. Diana has a saving of $30,000 and is considering two alternative options:

Option 1: Investing that $30,000 in an investment that would pay a rate of return of 8% annually, compounding semi-annually for 5 years.

Option 2: Obtaining a personal loan of $20,000 from a bank to take the European 1-month holiday now and pay the debt in 5 years. The current interest rate the bank offered for the new personal loan is 5% annually, compounding monthly.

Required:

1. Compute the effective annual interest rate (EAR) Diana would actually get in Option 1. (2.5 marks)
2. Calculate the amount of money Diana would accumulate in Option 1 after 5 years.(2.5 marks)

3. ANSWER:

4. How much longer does Diana need to wait until she has $50,000 to get her dream holiday in Option 1? (2.5 marks)

5. ANSWER:

6. Calculate the monthly debt repayment Diana needs to pay the bank for 5 years in Option 2. (2.5 marks)
7. ANSWER: