Katie wants to borrow $30,000 for 10 years. She has the following options:

From one source, money can be borrowed at j= 10% and amortized by ten equal annual payments R1.

Katie makes two annual payments each year. Firstly, annual payment R2 Katie made is only used to cover the interest generated by the principal (i.e. each year, after paying R, the whole principal of the loan stays the same). Secondly, annual deposit R3 is saved into a bank account with nominal rate j4= 8%, such that after 10 years, the balance in this account is just enough to cover all the principal of this loan.

(a) Calculate R1, R2, and R3

(b) Based on the previous calculation, which option should Katie choose?Hint: Think about what is the cost for these two options each year.