You are going to pay off a car loan with payments of $500 every quarter for the first year and $1,000 every quarter during the second and third years. The return-guarantee investment account from which you make the loan repayments earns a quarterly rate of return of 4% and the first payment begins in three months.

i) How much will the account balance increase three years from now if you do not have to make any of the repayments?

ii) What is the minimum amount you need to have in the investment account today in order to make all the repayments?

(b) How much should you pay to buy an asset today that will pay you $5,000 every month, with the first payment eight months from now and the last payment 3 years from now? The relevant discount rate is 2% every month.

Answer rating: 100% (QA)

Answer Part i Account Balance without Repayments Step 1 Calculate the number of quarters First year 4 quartersyear 1 year 4 quarters Second Third year ... View the full answer