Question 1

Mention the appropriate BA II Plus keys (where required).

I. Ahmed borrowed Rs.500,000 from a bank on terms of 10 year, 10% nominal interest rate. The loan calls for quarterly payments.

a) Calculate the amount of quarterly payment you would be paying every period?

b) How much is the total amount of interest that Ahmed has paid in two years? What is the ending balance of principal after two years?

II. As an electronics store manager, you want to offer credit to your customers. The customers will pay interest on the outstanding balance to the store manager as a compensation for buying more time to make payment on the purchase. The interest on outstanding balances will be paid monthly. However, you need to finance working capital so that the daily operations are not halted. Therefore, you must borrow funds from your bank at a quoted interest rate of 8%, monthly compounding. To offset your overhead, you want to charge your customers the effective rate of interest that is 1.5% more than the bank is charging you. What nominal rate should you charge your customers?

III. A 20 year old wants to retire as a millionaire by the time she turns 70. (With life spans increasing, and the social security fund being depleted by baby boomers, the retirement age will have invariably risen by the time she reaches 65 years of age, probably to something even higher than 70, actually.) How much will she have to save at the beginning of each month if she can earn 5% compounded annually and have $1,000,000 by the time she is 70?