Part (2a)
Amari and Iyana are saving for their daughter Zehra's college education. Zehra just turned 10 (at t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $16,000 a year, but they are expected to increase at a rate of 4.0% a year. Zehra should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, Amari and Iyana have accumulated $17,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $6,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 7%. How large must the annual payments at t = 5, 6, and 7 be to cover Zehra's anticipated college costs?
PART (2b)
You plan to borrow $43,300 at a 7.7% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?