Question

1. 1-Sara and Lama are working in the same company and having the same salary SAR 15,000. Lama has borrowed SAR 10,000 from AL Rajhi Bank one year ago and has to pay it back in a monthly basis.

   A broker called Sara and told her that there is a great investment opportunity where Sara can invest her money and gain 3.4% monthly interest. Sara told her friend Lama about the investment opportunity and they’ve decided to invest the coming salary SAR 15,000 for 24 months. However, Lama needs the interest received from the investment to pay back her loan from the bank each month. But Sara will not withdraw any amount from her investment account until the 24 months end.

2. How much is the total profit received by Sara, and the total profit for Lama? (2 points )

Explain why there is a difference between the profits if so. (2 points )

Answer 1

1) How much is the total profit received by Sara, and the total profit for Lama?

Total profit received by Sara:

=> Since Sara is not withdrawing any amount in the 24 months, she will receive interest on that interest amount.(compound interest)

=> The formula to calculate the final amount Sara will be having at the end of 24 amount is , where P is the Initial Investment amount ( 15,000) , r is the monthly interest rate (3.4%) and t is the time period (24 months).

=> Plug the values into the formula to get the final amount

=> Therefore the total profit received by Sara = Final Amount - Initial amount = 33,464.49 - 15,000 = SAR 18,464.49

Total profit received by Lama:

=> Here Lama is withdrawing her monthly interest (for 24 months), so she will only receive interest on the principal for 24 months.

=> We can find the total interest recieved by Lama by using the formuala, (Simple Interest) , where P is the initial investment amount (15,000) , r is the monthly interest rate (3.4%) and t is the time period (24 months)

=> Plug the values into the formula

* 15,000*0.034*24 = 12,240

=> Therefore the total profit received by Lama = SAR 12,240

2) Explain why there is a difference between the profits if so.

=> In case of Sara her interest is compounded monthly. This means she recieves 3.4% interest on the amount she invested (15,000) and In addition to that she will also recieve interest on the interest amount she is recieving monthly (Since she is not withdrawing any amount).

=> In case of Lama, she will only recieve the interest amount on the initial amount she invested (15,000) since she takes back her monthly interest to payback her borrowed amount.