Question 1 (20 marks)

(a)

You are going to pay off a car loan with payments of $500 every quarter for the first year and

$1,000 every quarter during the second and third years. The return-guarantee investment

account from which you make the loan repayments earns a quarterly rate of return of 4% and

the first payment begins in three months.

i)

How much will the account balance increase three years from now if you do not have to

make any of the repayments?

(10 marks)

ii)

What is the minimum amount you need to have in the investment account today in order

to make all the repayments?

(4 marks)

(b)

How much should you pay to buy an asset today that will pay you $5,000 every month, with

the first payment eight months from now and the last payment 3 years from now? The relevant

discount rate is 2% every month.