Question 1 (4 marks)

You want to buy a car, and a local bank will lend you AED 240,000. The loan would be fully repaid over 8 years, and the nominal interest rate would be 12%, with interest paid monthly.

What is the monthly loan payment? Use the simple approach in converting annual to monthly rates.

Question 2 (8.5 marks)

Assume that one year from now you plan to deposit AED 350,000 in a savings account that pays a nominal rate of 4.8 percent.

Question A (2 marks)

If the bank compounds interest annually, how much will you have in your account seven years from now?

Question B (2.5 marks)

What would your balance be seven years from now if the bank used quarterly compounding rather than annual compounding?

Question C (2 marks)

Suppose that you deposited the AED 350,000 in seven payments of AED 50,000 each at the end of years 1, 2, 3, 4, 5, 6 and 7. How much would you have in your account at the end of year 7, based on 4.8 percent annual compounding?

Question D (2 marks)

Suppose that you deposited seven equal payments in your account at the end of years 1, 2, 3, 4, 5, 6 and 7. Assuming a 4.8 percent interest rate, how large would each of your payments have to be for you to obtain the same ending balance as you calculated in Question A?