In: Finance
Question 1
Benjamin, a software engineer, would like to invest in an
attractive fund sold by a bank. The
fund is to buy the stock of Big Bang Company. It is assumed that
the fund can pay dividend
steadily for the coming 10 years, which will generate an equivalent
return of 5% annually, and
the bank charge is negligible. He is thinking of investing ($10,000
) at the end of
each month in this fund for the purpose of using it for the down
payment of purchasing a real
property in the future.
(a) How much down payment would he have accumulated at the end of
10th
year? (Use 4
decimal places of the interest rate factor to do your calculation
and round off your final
answer to integer.)
(b) Ten years later, he gets married. Although the fund value
has increased a lot and became
sufficient for him to pay for the down payment of purchasing a
residential property, they
still have to borrow ($5,000,000 ) from a bank. They select a 20
years
mortgage plan at 3% annual interest rate.
What is the amount of their monthly instalment? (Use 4 decimal
places of the interest
rate factor to do your calculation and round off your final answer
to integer.)
(c) Several years later, they bear a child. They plan to join an
education fund today with a
guarantee return of 4% annually. Their target is $580,000 (in today
dollar value) to be
redeemed at the end of 18th year. They plan to save ($10,000 ) at
the end of
each year and increase by ($5,000 ) each year starting from Year
2.
Can their target be achievable? Show detailed steps of your
analysis. (Use 4 decimal
places of the interest rate factor to do your calculation and round
off your final answer to
integer.)
With clear Steps thanks
Formulas Used
1.
Step1. Calculation of future value of annuity.
Investment Amount | =10,000 |
Dividend Interest(Monthly)(5%/12) | =0.004166667 |
Total Time((10*12)-1) | =119 (Refer Step 2) |
Future Value Factor of annuity | =((1+r)^n-1)/r |
where r = rate, n = total time. | =((1.004166667)^119 - 1)/004166667 |
=(1.640175 + 1)/004166667 | |
=153.6421 | |
Future Value of annuity | =FV Factor*Annuity |
=153.6421*10000 | |
=15,36,421 |
Step 2. Since, the payments made are at the end of the year, interest will not be paid on the last payment and hence 119 is considered as total time period for the calculation of future value on the annuity. We shall add the last month's $10,000 to find the final answer.
Hence the future value of the investment = 1,536,421 + 10,000 = $1,546,421
2.
Loan Amount | 5000000 |
Time Period(Monthly)(20*12) | 240 |
Interest Rate(3%/12) | 0.0025 |
Present Value Factor | (1-(1+r)^n)/r |
where r= interest, n = time period | |
(1-(1+0.0025)^-20)/0.0025 | |
(1-0.450777)/0.0025 | |
180.3109 | |
Monthly Payment | Loan Amount/PVF |
5,000,000/19.4844 | |
$27,729.88 | |
Or USING PMT function in excel | |
Monthly Payment | $27,729.88 |
Hence, the monthly payments are $27,729.88
3.
Every year their is an increase of $5000 in the investment. If they invest $10,000 today, 2nd year it will be $15,000, 3rd year it wil be $20,000. We shale make a table a find a future value factor for each year and multiply it by the respective amounts. We will sum all these to find the aggregated value.
Clearly, the amount accumulated is greater than the requried amount i.e $580,000. The amount accumulated is $1,260,623.00.
Hence, they should go for the investment
If you have any doubt, ask me in the comment section please.