Question

Question 2 (This question is from the Week 3 and Week 4 Tutorials) Sally has $50 000. She wants to save $120 000 to deposit for her first home loan. She decided to put that $50 000 in an investment fund that pays an interest rate of 11% per annum (per year), compounding annually. Required:

a. How long does she need to wait until she has saved $120 000?

b. If Sally wishes to have that $120 000 in five years, how much does she need to put into the investment now with the same interest rate of 11%?

c. Assume that Sally was offered an alternative investment, which requires an initial investment of $60,000 for 7 years. Calculate the amount of money Sally would accumulate after 7 years by this investment, if the rate of return is 11.5%, compounding quarterly?

d. Assume that Sally was offered two (2) other alternative investments in the securities market: i. Option A pays an interest rate of 10% p.a. (per year), compounding semiannually. ii. Option B pays an interest rate of 9.87%, compounding monthly. Which option (A or B) should Sally choose?

e. Assume that Sally has already got her $120,000 for the home loan deposit and now she wants to purchase a house which costs $450 000. Her plan is to pay that $120,000 down in cash and finance the balance over 30 years at the interest rate of 2.5%. What will be her monthly mortgage payment?

f. At the end of this year Sally will receive a fixed income of $15,000 each year forever. If the required rate of return is 12%, what is the present value of this income flow? (1 mark)

Answer 1