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A bank offers a customer two different repayment options on a loan of 50,000 as follows: Option 1-level instalments of capital and interest are



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A bank offers a customer two different repayment options on a loan of 50,000 as follows: Option 1-level instalments of capital and interest are paid annually in arrear over a period of 20 years. Option 2-over the 20-year term the customer pays only interest on the loan, annually in arrear at a rate of 5.5% per annum with the whole of the capital amount payable at the end of the term. The customer will take out a separate savings policy which involves making monthly payments in advance such that the proceeds will be sufficient to repay the loan at the end of its term. The payments into the savings policy accumulate at a rate of interest of 4% per annum effective. (i) (ii) Determine the effective rate of interest per annum that would be paid by the customer on the loan under Option 1, given that the level annual instalment on this loan is 4,012.13. Determine the annual effective rate of interest paid by a customer under Option 2. [3] [7] [Total 10]

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