Question

Calculate all the questions given using appropriate formulas.

(a) You bought a car for RM 30,000 and will borrow RM 30,000 from the bank for 4 years. The interest charge is 7% per annum. Using simple interest calculation:
How much interest do you have to pay to the bank?      

What is the total payment for your car?              

(b) You bought a house for RM 300,000 and will borrow RM 300,000 from the bank for 4 years. The interest charge is 7% per annum. Using compounding interest calculates:

How much interest do you have to pay to the bank?

What is the total payment for your car?

(c) You invested RM 600 into a local bank’s investment product at 7% rate.

What would your investment be worth in 6 years?

  
What would your investment be worth in 5 years?

What do you learn from the two different answers (i) and (ii)?

(d) What will be the present value of RM 600 to be received 9 years today?

If the discount rate is 5%?

If the discount rate is 4%?

What do you learn from the two different answers (i) and (ii)?

You deposited RM 600 in the bank every year at 9%. What would your savings be worth at the end of

4 years?

  
5 years?

What do you learn from the two different answers (i) and (ii)?

              

Answer 1

Part a

Amount borrowed	30,000.00
Period (in years)	4
Interest rate	7%

Simple Interest = Principal x Interest rate x period

Simple Interest = 30000 x 7% x 4

Simple Interest = RM 8,400

Total payment of the car = Amount borrowed + Interest

Total payment of the car = 30,000 + 8,400

Total payment of the car = RM 38,400

Part b

Amount borrowed	300,000.00
Period (in years)	4
Interest rate	7%

Compound Interest = (Amount borrowed x (1+ Interest rate)^period) - Amount Borrowed

Compound Interest = (300000x (1+ 7%)^4) - 300000)

Compound Interest = (300000x 1.31) - 300000)

Compound Interest = (393238.8 - 300000)

Compound Interest paid to bank = 93,238.8

Total payment to the bank = Amount borrowed + Interest

Total payment to the bank = 300000 + 93238.8

Total payment to the bank = RM 393,238.8

Part c

Invested for 6 years

Amount invested	600.00
Period (in years)	6
Interest rate	7%

Investment worth = Future value of investment made

Investment worth = Amount invested x (1+Interest rate)^period

Investment worth = Amount invested x (1+7%)^6

Investment worth = 600 x 1.50

Investment worth = RM 900

Invested for 5 years

Amount invested	600.00
Period (in years)	5
Interest rate	7%

Investment worth = Future value of investment made

Investment worth = Amount invested x (1+Interest rate)^period

Investment worth = Amount invested x (1+7%)^5

Investment worth = 600 x 1.40

Investment worth = RM 840

From above answers we note that as period increase investment worth increases on account of interest component

Part d

Discount rate is 5%

Future value of amount to be received	600.00
Period (in years)	9
Interest rate	5%

Present value = Future value x PV factor

Present value = Future value x ((1+interest rate)^-period)

Present value = Future value x ((1+5%)^-9)

Present value = 600 x 0.64

Present value = RM 384

Discount rate is 4%

Future value of amount to be received	600.00
Period (in years)	9
Interest rate	4%

Present value = Future value x PV factor

Present value = Future value x ((1+interest rate)^-period)

Present value = Future value x ((1+4%)^-9)

Present value = 600 x 0.70

Investment worth = RM 420

From above answers we note that as interest rate increases Present value of future receipts would decrease on account of opportunity cost.

Part e

Annuity for 4 years

Annuity payment	600.00
Period (in years)	4
Interest rate	9%

Future value of annuity = Annuity payment x FV factor

Future value of annuity = Annuity payment x (((1+interest rate)^period-1)/Interest rate)

Future value of annuity = Annuity payment x (((1+9%)^4-1)/9%)

Future value of annuity = 600 x 4.57

Future value of annuity = RM 2,742

Annuity for 5 years

Annuity payment	600.00
Period (in years)	5
Interest rate	9%

Future value of annuity = Annuity payment x FV factor

Future value of annuity = Annuity payment x (((1+interest rate)^period-1)/Interest rate)

Future value of annuity = Annuity payment x (((1+9%)^5-1)/9%)

Future value of annuity = 600 x 5.98

Future value of annuity = RM 3,588

From above answers we note that as annuity period increases Future value of annuity payments would increase.